US steps up pressure for European 'firewall'

Timothy Geithner has urged European governments to
work alongside the ECB to solve the debt crisis
© AFP Karen Bleier

WASHINGTON (AFP) – The United States ramped up pressure on Europe Saturday to take swift action to contain the eurozone debt crisis, warning that the entire global economy is at stake.

“Sovereign and banking stresses in Europe are the most serious risk now confronting the world economy,” US Treasury Secretary Timothy Geithner said in a speech to the International Monetary Fund’s steering body.

“Further action to expand the effective capacity of these commitments is still necessary to create a firewall against further contagion,” Geithner said, according to the prepared text.

The eurozone debt crisis, and Europe’s widely criticized approach to handling it, have dominated the discussions at the annual IMF-World Bank meeting this week in Washington.

Addressing the International Monetary and Financial Committee (IMFC), Geithner said that the 17 nations sharing the euro had made “impressive” commitments to each other in the past 18 months, but a more coordinated effort is needed.

“While it is crucial that countries in the periphery undertake real reforms and demonstrate fiscal discipline, these efforts will take time.”

Geithner called for European governments to work alongside the European Central Bank to show an “unequivocal commitment” to prevent the debt problems of Greece, Ireland and Portugal from causing a global meltdown.

The governments and ECB must work to “ensure nations with sound fiscal policies have affordable financing, and to ensure that European banks have recourse to adequate capital and funding to win the full confidence of their depositors and creditors,” he said.

“The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally.”

Geithner reiterated US frustration with the pace of Europe’s approach to the debt crises.

“Decisions as to how to conclusively address the region’s problems cannot wait until the crisis gets more severe,” he said.

Europe’s banks, particularly French banks, have seen interbank funding lines tightened and their shares sold off by investors worried about their holdings of sovereign debt from Greece and the eurozone’s other financially embattled governments.

In a BBC interview broadcast early Saturday, Geithner stressed that markets, which have been in panic this week over EU and US economic weakness, are moving “much more quickly” than Europe’s leadership is moving.

“These things have the classic dynamic that the longer you wait, the harder it is to solve,” he said.

He said Europe’s leaders had been relying too heavily on the European Central Bank to solve the region’s fiscal problems, where peripheral eurozone economies Greece, Ireland and Portugal have had to be bailed out by the IMF and the EU.

As Greece teeters toward defaulting on its sovereign debt, a second bailout plan proposed by European leaders and private creditors on July 21 awaits ratification by the 17 eurozone member nations.

“We are confident that all euro area member states will ratify the agreement,” EU monetary affairs chief Olli Rehn told the IMF panel.

A spokesman for Rehn said the target was mid-October. So far, fewer than one-third of the 17 eurozone members parliaments have approved the deal.

Developing countries at the meetings in Washington also expressed worries that their economies would be hit badly if Europe, at the epicenter of the financial turmoil, failed to get a grip on its problems.

Addressing the IMF on behalf of eight Latin American countries, Guido Mantega, the finance minister of regional powerhouse Brazil, said that European policymakers were responsible “to ensure that their actions stop contagion beyond the euro periphery.”