What Geithner Will Tell His EU Mates

Jeremy Warner Daily Telegraph September 17, 2011

Saturday 17 September 2011 | Blog Feed | All feeds

By Jeremy Warner Economics Last updated: September 16th, 2011

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Tim Geithner, the US Treasury Secretary. (Photo: AP)

So alarmed have American policymakers become over the gathering eurozone debt storm and the threat it poses to the world economy, that the US Treasury Secretary, Tim Geithner, is taking the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday afternoon, his second visit to Europe in only a week.

US political leaders are scarcely in any position to lecture their European counterparts on how to manage an economic crisis – they are already making a ruinous hash of their own – yet it sometimes takes an outsider to give the sort of perspective that the narrow constraints of domestic political agendas denies to those in the thick of the action. So this is the message Mr Geithner should be delivering. Similarly able to give an outsider's view, George Osborne, the UK Chancellor, will be reading from the same script. It is often easier to prescribe for others than yourself.

Forget eurobonds, high falutin' notions of a federal banking system, and action to establish fiscal and political union – all these things may be necessary to underpin the euro in the long term, but they are going to take many years to agree and implement. The immediate crisis requires more immediate solutions.

What we are dealing with here is not so much a sovereign debt crisis – though we certainly have that – as a profound banking crisis. As a matter of urgency, then, governments must take immediate steps to recapitalise their banking systems. Central bankers on Thursday moved to offer further liquidity support, but this is really only a sticking plaster solution. Funding difficulties are only the outward symptom of a more fundamental and underlying solvency crisis.

It follows that governments must urgently implement the 21 July agreement, which gives the â?¬440bn European rescue fund discretion to use the money for bank bailouts. Once banks are sufficiently re-capitalised, then it might be possible to move forward with a sensible restructuring of Greek and perhaps other periphery eurozone sovereign debt.

The modest restructuring of Greek debt agreed in July is plainly nowhere near enough, which is why we've seen a ratcheting up of the European banking crisis. Everyone knows there are further, massive write-offs to come. Greek debt alone is going to have to be written down by anywhere between 50 and 80pc. Since EU and IMF rescue loans count as preferred credit, that may mean writing off the rest close to zero.

So far George Papandreou, the Greek prime minster, has played a cute game. He's promised, in order to win the next tranche of bailout funds, to do whatever it takes to meet the conditions opposed on him by the July 21 agreement.

Everyone knows it's a charade, but ludicrously the public pretence that it's for real is maintained. Mr Papandreou has no chance of meeting his fiscal targets, but once he's got the money, he can renegotiate at leisure. Europe's political class needs to be more honest and open about what's going on. Greece is going to default; either this can be announced as a fait accompli, or it can be done in an orderly and negotiated fashion. The latter approach is generally best.

But as I say, the most important thing is to spell out how the banking system is to be recapitalised. Do I expect EU finance ministers to listen? Well, one thing is for sure; we are not going to get a statement tonight which spells all this out. But anyone with half a brain can see what needs to be done, and there are signs that it is finally beginning to sink in.

UPDATE: Since writing this blog earlier today, details have emerged of a plan Tim Geithner put to fellow finance ministers for expanding the European bailout fund, the so called European Financial Stability Facility. It was a good scheme that would have allowed the EFSF to be leveraged up to a much larger size along the lines of the mechanism used in the US for bank bailouts. But predictably he was given short shrift. Outside ideas not welcome, apparently. I grow ever more pessimistic about prospects for a happy ending.

Tags: debt crisis, EU, Tim Geithner, urope, US Treasury

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