Europe Pressured by Geithner, Soros to Come to Grips With Sovereign Crisis

By Rainer Buergin and Belinda Cao - Sep 26, 2011 1:45 AM GMT+0700

European policy makers faced mounting pressure from foreign counterparts and investors to step up efforts to prevent their sovereign debt crisis from further roiling the world’s financial markets and economy.

U.S. Treasury Secretary Timothy F. Geithner set the tone at the annual meeting of the International Monetary Fund in Washington by warning that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

Such calls leave European policy makers under pressure to further boost the ammunition of their regional rescue fund even as parliaments focus on ratifying a July plan to broaden its powers. Trading resumes tomorrow after global stocks entered their first bear market in two years last week on concern Greek insolvency is inevitable and Europe can’t contain the damage.

“The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence,” People’s Bank of China Governor Zhou Xiaochuan said at the IMF talks, which conclude today.

‘Firewall Against Contagion’

In his strongest public push yet for action, Geithner pressed governments to unite with the European Central Bank to “create a firewall against further contagion” and defuse the “most serious risk now confronting the world economy.” Antonio Borges, the head of the IMF’s European department, said today the ECB is the only agent that can “scare” the markets.

Geithner wants authorities to use leverage to increase the spending strength of the 440 billion-euro ($594 billion) European Financial Stability Facility. Bank of Canada Governor Mark Carney said 1 trillion euros should be deployed.

There are indications European governments are heeding the advice although they signaled a preference to first pass into law a revamp of the EFSF that will allow it to buy bonds and aid banks. European members of the Group of 20 agreed Sept. 22 to “maximize” the fund’s impact, while there are also discussions under way on speeding the start of a permanent rescue program.

They may be working against the clock. Greece has yet to secure a second bailout amid questions about whether it can satisfy the aid terms. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December. Analysts at JPMorgan Chase & Co. predict the euro area will start contracting in the fourth quarter and that the ECB will cut interest rates next month.

‘Fundamental Issues’

“Policy makers need to move beyond ad hoc financial responses to address fundamental issues about the nature of European monetary and economic integration,” Deutsche Bank AG Chief Executive Officer Josef Ackermann told a banking conference in Washington.

Germany’s government has already begun debating how to shore up its banks if Greece defaults. One official from a G-20 country said yesterday that an eventual insolvency in the Mediterranean nation is likely.

Speaking to a banking conference in Washington today, Greek Finance Minister Evangelos Venizelos said his country “wants to make it and will make it,” and will never leave the euro.

Proposals to beef up the facility’s spending power include using the bonds it buys from stressed states as collateral for fresh loans from the ECB or offering the central bank credit protection for helping investors buy debt.

Increasing Heft

German Finance Minister Wolfgang Schaeuble said the ECB wasn’t necessarily needed to increase the facility’s heft, while Bundesbank President Jens Weidmann said involving the central bank would violate EU treaties. Schaeuble again rejected euro- area countries issuing joint bonds. Klaus Regling, the head of the EFSF, said today he doubts accessing the ECB “will fly” and that other ways of bolstering the fund may be detailed soon.

European finance officials will also examine this week the cost advantages of setting up the permanent fund, known as the European Stability Mechanism, a year earlier than its currently planned July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News. Spanish Economy Minister Elena Salgado said yesterday she would back early adoption of the fund and Schaeuble said that may be possible.

In a sign some in Europe resent Geithner’s campaign, outgoing ECB Executive Board member Juergen Stark said governments should do their “own homework before they give advice.” ECB President Jean-Claude Trichet noted Sept. 23 that the U.S. budget gap dwarfs that of the euro-area.

While the IMF vowed to “strongly support” Europe, Managing Director Christine Lagarde said its $384 billion lending chest may not be enough to meet all aid requests if the world economy worsens. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders,” she said.

To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net