Bloomberg News

Europe Wins Praise From Geithner, Cohn as IMF, Germany Spar

October 11, 2012

U.S. Treasury Secretary Timothy Geithner

Timothy Geithner, U.S. treasury secretary. Photographer: Kiyoshi Ota/Bloomberg

Europe’s efforts to counter the fiscal crisis won praise from international finance chiefs and bankers even as Germany and the International Monetary Fund clashed over the next measure in the fight.

As the IMF hosts its annual meeting in Tokyo, U.S. Treasury Secretary Timothy F. Geithner said yesterday that the euro area is now on a “much more powerful, promising path.” Bank of America (BAC:US) Corp. Chief Executive Officer Brian T. Moynihan told Bloomberg Television that although the turmoil will “ebb and flow,” it is now in a “pretty good equilibrium.”

The sentiment has shifted from a year ago, when Geithner used the IMF talks to say Europe’s lackluster policy response left the region prone to “catastrophic risk.” What’s changed is euro-area governments now have a permanent 500 billion-euro ($646 billion) rescue fund and the European Central Bank stands ready to buy bonds from stressed sovereigns.

The ECB “removed a lot of the risk off the table,” Goldman Sachs Group Inc. (GS:US) President and Chief Operating Officer Gary Cohn said in an interview.

Europe’s strains are again the central challenge facing the IMF’s 188 member nations. The Washington-based lender said this week that failure to remedy them was helping to generate an “alarmingly high” risk of a steeper slowdown in the world economy, already on course to expand this year by the least since the 2009 recession.

‘Bad News’

Noting there is always “good news and bad news” with the euro region, IMF Managing Director Christine Lagarde proposed allowing countries such as Greece and Spain more time to reduce their budget deficits. She also suggested debt reductions may be needed in Greece before a 130 billion-euro bailout can proceed.

“It’s sometimes better to have a bit more time,” she told reporters, two days after an IMF study concluded worldwide budget cuts are having a bigger impact on economic output than previously reckoned.

The proposals were pushed back by German Finance Wolfgang Schaeuble, who said that European governments cannot accept losses on their Greek debt holdings and that when there is a “medium-term goal, it doesn’t build confidence when one starts going in a different direction.”

Global Drag

All the warm words toward Europe’s reinvigorated strategy were couched with concern that it could still backslide and will remain a drag on expansion worldwide.

Three years to the month since Greece’s budget woes sparked the biggest threat to the euro’s existence and with the 17- nation economy set for recession, Spain now sits in the sights of investors. As it mulls whether to ask for a bailout and accept the conditions required for the ECB to start buying its bonds, the country’s debt rating was cut this week to one level above junk by Standard & Poor’s.

Having fallen from a peak of 7.75 percent in July, the Spanish 10-year bond yield is creeping back up after Prime Minister Mariano Rajoy last week pushed back expectations of aid, telling reporters no request was imminent.

“The debt and financial-sector problems in Europe pose the biggest downside risk to the global economy,” Japanese Finance Minister Koriki Jojima told reporters.

Canadian Finance Minister Jim Flaherty said in an interview that although there is “cautious optimism,” Europe’s banks are weak, and some need recapitalizing.

‘Spectacular Job’

While ECB President Mario Draghi is doing a “spectacular job,” the central bank cannot address Europe’s long-term growth flaws and it’s likely a euro-area member will leave at some point, Goldman Sachs’s Cohn said.

The euro-area’s success in implementing reforms is still being underestimated, said Schaeuble, citing declines in budget deficits and improvements in competitiveness.

“We have made more progress than one would think” when looking at the headlines, he said.

Beyond the headache of Europe, Geithner said U.S. lawmakers should not delay dealing with the $600 billion in government spending cuts and tax increases which are set to take effect at the beginning of next year unless Congress acts.

A pact that allows for deficit reduction over time and opens up room for investment in the shorter-term would leave the U.S. with “the potential to grow significantly faster” he said. “We’re going to take a run at it.”

Japan’s Jojima said he told a short meeting of Group of Seven central bankers and finance ministers that the yen is hurting his economy as it trades close to the postwar high of 75.35 per dollar reached last October.

Emerging Markets

Brazilian Finance Minister Guido Mantega said the so-called BRICS nations of Brazil, Russia, India, China and South Africa are working to create a pool of reserves to provide a “rearguard” of financial support.

“The best moment to do this is now when we, the BRICS, don’t need this help,” he said.

Still, officials including Lagarde warned that such emerging markets are now slowing alongside developed counterparts in a change from recent years.

“We are seriously concerned about the fragility of the global economic and financial situation,” the Group of 24 developing nations said.

To contact the reporters on this story: Simon Kennedy in Tokyo at skennedy4@bloomberg.net; Rainer Buergin in Tokyo at rbuergin1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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