Bloomberg News

Finance Chiefs Vow to Back Banks as Debt Woes Roil Markets

September 11, 2011

(Adds French banks in fourth paragraph and Greek prime minister in 19th. See GMEET <GO> for more on the G-7 meeting.)

Sept. 11 (Bloomberg) -- Group of Seven finance chiefs vowed to support banks and buoy slowing economic growth as Europe’s debt crisis roiled financial markets and threatened a global recession.

“We will take all necessary actions to ensure the resilience of banking systems and financial markets,” G-7 finance ministers and central bankers said in a statement released during weekend talks in Marseille, France. “Concerns over the pace and future of the recovery underscore the need for a concerted effort at a global level in support of strong, sustainable and balanced growth.”

Renewed fears that European policy makers are failing to prevent a Greek default and contain their debt woes last week prompted investors to sell stocks and push the euro to a six- month low against the dollar. European bank and sovereign credit risk reached all-time highs as 10-year Treasury and German bund yields fell to record lows on demand for a haven.

Germany moved toward insulating its banks against the fallout of a possible Greek default and Juergen Stark’s resignation from the European Central Bank exposed the policy rifts aggravating the debt turmoil. BNP Paribas, Societe Generale SA and Credit Agricole, France’s largest banks by market value, may have their credit ratings cut by Moody’s Investors Service as soon as this week because of their Greek holdings, two people with knowledge of the matter said.

Lehman Anniversary

Such shifts highlight the biggest risk to international expansion and financial market stability since the collapse of Lehman Brothers Holdings Inc. three years ago this month.

The sense of disarray drew fire from G-7 officials with U.S. Treasury Secretary Timothy F. Geithner lobbying his European counterparts to get their act together. Canadian Finance Minister Jim Flaherty even suggested Greece may need to quit the euro.

“It’s not going to be an easy time in Europe for the next while, but certainly I’m satisfied that there is a resolve to deal with the problem,” Flaherty said in an interview yesterday.

European authorities “need to do whatever they can do to calm these pressures,” Geithner told Bloomberg Television. “They have to demonstrate they have enough political will.”

U.S. Slowdown

Europe isn’t the only threat to the world economy with U.S. unemployment above 9 percent and Japan struggling with the effects of a strong yen. The G-7 officials detailed no new policies. Undermining their ability to revive expansion are benchmark interest rates already around record lows and public debts at unprecedented highs.

Dogged by voter unrest and ideological splits, Europe’s leaders have reignited investor unease less than two months since they outlined their latest remedy for a crisis nearing its second anniversary. Finland is demanding collateral from Greece in return for fresh aid and German lawmakers want veto power.

“We need Europe to have its moment of truth, to recognize that the current course isn’t sustainable,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview on Bloomberg TV’s “In the Loop” with Betty Liu. “They need to opt for one of two options: either full fiscal union, or a smaller, stronger euro zone.”

Central banks will “maintain price stability and continue to support economic recovery” and provide liquidity “as required” to lenders, while governments will pursue “growth- friendly” budget cuts, they said in their statement.

Yen ‘Actions’

Japanese Finance Minister Jun Azumi ended his first G-7 meeting without his counterparts objecting to his pledge to take “bold actions” to stem yen gains, paving the way for a fresh intervention if he deems it necessary. The G-7 said while it prefers markets to set currency values, disorderly and excessive movements can undermine stability.

Evidence of another split at the heart of European policy making was highlighted by Stark’s unexpected announcement two days ago that he will quit the ECB’s Executive Board. Stark made the decision after privately protesting the bank’s program of purchasing stressed government bonds, which was widened last month to include those of Spain and Italy, a euro-area central bank official said.

The bond buying, which has totaled 129 billion euros ($177 billion) since it began in May 2010, was the ECB’s effort to soothe markets as governments sought longer-term solutions. It opened the Frankfurt-based central bank to criticism even from within its ranks that it blurs the line between monetary and fiscal policy and risks bloating its balance sheet.

Finance Minister Wolfgang Schaeuble yesterday said Germany will nominate his deputy, Joerg Asmussen, to replace Stark.

Plan B

Reflecting mounting concern Greece may default and that the debt crisis is morphing into a banking crisis, German Chancellor Angela Merkel’s government is preparing plans to shore up its nation’s financial sector. The measures involve aiding lenders and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said three coalition officials, who spoke on condition of anonymity because the deliberations are private.

The existence of a “Plan B” comes as German lawmakers intensify their criticism of Greece, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress.

Greek Prime Minister George Papandreou said late yesterday that his government’s top priority is “to save the country from bankruptcy” and he’ll fight to keep Greece in the euro even if that means more “difficult decisions.” Credit-default swaps on Greek debt have climbed to a record, signaling a more-than 90 percent chance the nation will fail to meet debt commitments.

Greece is relying on a sixth payment of 8 billion euros in international loans. The payment comes under the terms of the May 2010 bailout as European Union leaders struggle to put together a second rescue package, which combines a voluntary debt swap and state asset sales.

Separately in Marseille, French Finance Minister Francois Baroin said yesterday the Group of Eight countries will increase to $38 billion aid for Egypt, Tunisia, Morocco and Jordan following political turmoil earlier this year. International Monetary Fund Managing Director Christine Lagarde said the lender now recognizes the National Transitional Council as holding Libya’s IMF seat, and she’ll soon send a team to the North African country.

--With assistance from Rainer Buergin, Jana Randow, Mark Deen, Gonzalo Vina, Gregory Viscusi, Toru Fujioka, Helene Fouquet, Peter Cook, Francine Lacqua, David Tweed, Ian Katz in Marseille, Matthew Brockett and Jeff Black in Frankfurt and Alan Crawford and Brian Parkin in Berlin. Editors: James Hertling, Andrew Atkinson.

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

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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