In a Saturday meeting of the International Monetary Fund (IMF) in Washington, United States Treasury Secretary Timothy Geithner called for European financial policy makers to pump over a trillion dollars of liquidity into the market to alleviate the sovereign debt crisis and avoid the “threat of cascading default, bank runs and catastrophic risk.”
The remarks by Geithner came amid growing investor concerns that the current debt crisis facing Greece could spread throughout the European Union, to countries such as Spain, Germany, Ireland, France and others, in upcoming weeks. Geithner told attendees at the IMF meeting that the issues facing government budget and private banks in the Eurozone are the “most serious risk now confronting the world economy,” and that governments should join the European Central Bank in order to “create a firewall against further contagion.”
Mark Carney, Bank of Canada Governor, has suggested that Europe pump in approximately 1 trillion euros (close to $1.35 trillion US dollars) in order to overwhelm the crisis. That amount would be over 100 percent larger than the current bailout package. United Kingdom Chancellor of the Exchequer George Osborne said that global action to assist European banks should be “credible,” while the IMF admits that some of the Eurozone financial institutions are in need of recapitalization. The IMF announced Saturday that it is ready to “strongly support” Europe, according to a recent Bloomberg article.
At Saturday’s IMF meeting, People’s Bank of China Governor Zhou Xiaochuan told attendees, “The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence.” Signs that European policy makers are paying attention to suggestions made by the IMF are apparent. They have looked into working with the ECB to provide liquidity to struggling European financial institutions and could also move quickly to begin lending to troubled banks. Billionaire George Soros on Saturday said that Eurozone nations should prepare for the possibility of a Greek sovereign debt default. Mohamed El-Erian, CEO of Pacific Investment Management Co. and former U.S. Treasury Secretary Lawrence Summers both compared the current European situation to the 2008 financial crisis.
Greek Sovereign Debt Concerns
In the event of a Greek sovereign debt default, officials in Germany have started debating how best to support German banks in a worst-case scenario. Meanwhile, ECB Governing Council member Klaas Knot told reporters on Friday that he now sees the possibility of a default in Greece, and another official of a G-20 country stated a Greek default is probable.
Finance officials throughout Europe will meet next week to evaluate the pros and cons of setting up a fund, deemed the European Stability Mechanism (ESM), as soon as mid-2012. The fund was originally scheduled to become active in July 2013. The ESM would contain approximately 500 billion euros and could help protect struggling countries such as Italy in case of a full-blown crisis.
European Financial Stability Facility
European Union Economic and Monetary Affairs Commissioner Olli Rehn, when recently asked by Bloomberg Television about an early start date for the ESM, instead gave signs that the EU would likely update the current 440 billion-euro European Financial Stability Facility (EFSF). EU officials earlier in the week began discussions on how to increase the amount of effectiveness provided by the EFSF in October, when it will have the ability to purchase bonds and aid banks.
Economists Daniel Gros and Thomas Mayer suggested the EFSF could operate as a financial institution and borrow from the European Central Bank, in turn using its purchased bonds in October as collateral. Others suggest the EFSF could guarantee ECB bond purchases or assist the central bank in loaning to investors who purchase debt from struggling countries.
U.S. Treasury Secretary Timothy Geithner made clear on Saturday that European officials should move swiftly and decide on the best course of action, stating, “Decisions as to how to conclusively address the region’s problems cannot wait until the crisis gets more severe.”