U.S Treasury Secretary Timothy F. Geithner said Europe remains the “central challenge” to global growth and must “move quickly” to restore financial stability.
Geithner, who is in Honolulu attending the 21-member Asia- Pacific Economic Cooperation conference, said in prepared remarks that the APEC countries are all directly affected by the Eurozone crisis and he encouraged them “to take steps to strengthen growth in the face of these pressures from Europe.”
European finance ministers earlier this week failed to bridge divisions over the European Stability Mechanism, a permanent rescue fund aimed at stemming the growing crisis over sovereign debt facing countries like Greece and Italy. The world economy is in a “dangerous phase,” IMF Managing Director Christine Lagarde said this week.
“As the United States continues to work through the problems that caused our crisis and Europe confronts a period of slower growth, Asian economies will need to do more to stimulate domestic demand growth -- both so they are less vulnerable to slowdowns, such as the situation in Europe, and so they can continue to contribute to global growth,” Geithner said at a news conference today.
Protect Growth
Geithner said concern over Europe dominated discussions in APEC meetings and hallway discussions. He didn’t point to ways the countries could assist Europe and instead remarked on how they could protect their own growth.
“These economies, including the United States, have the capacity to do things now to make growth stronger both to offset some of the pressures they’re facing in Europe but also because the world as a whole -- even when Europe stabilizes you are going to see growth damaged by the magnitude of the crisis so far,” Geithner said. “So there is a very strong rationale in those economies that have the capacity to do it to act now to strengthen growth.”
Italian 10-year bond yields surged to a euro-era high of 7.46 percent on Nov. 9 as investors questioned the ability of its lawmakers to restrain the euro-region’s second-largest debt load after Greece.
While the yield slipped to 6.89 percent yesterday, the crisis showed signs of spreading to France. Credit default swaps on the euro region’s second-largest economy rose eight basis points to a record 204 yesterday, CMA prices showed.
Italian Debt
Italian Prime Minister Silvio Berlusconi’s offer to resign on Nov. 7 triggered questions about who will lead the nation and left it struggling to produce a government stable enough to deliver austerity. Lucas Papademos, the former vice president of the European Central Bank, was named to lead a Greek unity government charged with securing financing to avert the country’s economic collapse.
At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece, Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and eighth-biggest economy.
Geithner said Europe is making progress with a “good framework” and he encouraged them to do more.
“That basic framework is a good framework but it needs to be put in place with the speed that markets require and with the force necessary to restore confidence and they’re moving ahead,” Geithner said. “We just need to see them move more quickly and with more force behind it.”
Lael Brainard, U.S. Treasury undersecretary for international affairs, said on Nov. 9 that Europe must speed up construction of a “firewall” to protect countries that have sound policies.
U.S. Exposure
The U.S. exposure to Italy is far greater than Greece. U.S. financial institutions’ direct loans to borrowers in Italy totaled $36.7 billion, compared with $232.3 billion in other types of indirect exposure, according to Bank for International Settlements data. At the same time, U.S. banks had total direct risk to Greece of $7.32 billion as of December and indirect commitments of $34.1 billion, BIS data show.
Failure to restore order to Italy may lead it to join Greece, Portugal and Ireland in seeking outside help. The first port of call would likely be the 440 billion-euro European Financial Stability Facility. A country can now tap a precautionary promise of support of up to 10 percent of its gross domestic product -- about 160 billion euros in Italy’s case.
China’s Currency
Geithner also encouraged China to allow its currency to strengthen.
“This process of rebalancing will be aided by exchange rate policies in China and other Asian economies that allow their currencies to adjust in response to market forces,” he said. “China, in particular, must continue to allow its currency to strengthen, and China has acknowledged the importance of faster exchange rate adjustment.”
The APEC finance ministers said in a communiqué that they are committed to moving “more rapidly” toward market- determined exchange rate systems and will increase currency flexibility to reflect their economic fundamentals.
The Obama administration contends that China’s currency is undervalued and has pushed it to allow the yuan to strengthen faster. President Barack Obama has pressed Chinese leaders to take steps to boost domestic consumption to reduce lopsided global trade and investment flows.
bloomberg.com
Geithner, who is in Honolulu attending the 21-member Asia- Pacific Economic Cooperation conference, said in prepared remarks that the APEC countries are all directly affected by the Eurozone crisis and he encouraged them “to take steps to strengthen growth in the face of these pressures from Europe.”
European finance ministers earlier this week failed to bridge divisions over the European Stability Mechanism, a permanent rescue fund aimed at stemming the growing crisis over sovereign debt facing countries like Greece and Italy. The world economy is in a “dangerous phase,” IMF Managing Director Christine Lagarde said this week.
“As the United States continues to work through the problems that caused our crisis and Europe confronts a period of slower growth, Asian economies will need to do more to stimulate domestic demand growth -- both so they are less vulnerable to slowdowns, such as the situation in Europe, and so they can continue to contribute to global growth,” Geithner said at a news conference today.
Protect Growth
Geithner said concern over Europe dominated discussions in APEC meetings and hallway discussions. He didn’t point to ways the countries could assist Europe and instead remarked on how they could protect their own growth.
“These economies, including the United States, have the capacity to do things now to make growth stronger both to offset some of the pressures they’re facing in Europe but also because the world as a whole -- even when Europe stabilizes you are going to see growth damaged by the magnitude of the crisis so far,” Geithner said. “So there is a very strong rationale in those economies that have the capacity to do it to act now to strengthen growth.”
Italian 10-year bond yields surged to a euro-era high of 7.46 percent on Nov. 9 as investors questioned the ability of its lawmakers to restrain the euro-region’s second-largest debt load after Greece.
While the yield slipped to 6.89 percent yesterday, the crisis showed signs of spreading to France. Credit default swaps on the euro region’s second-largest economy rose eight basis points to a record 204 yesterday, CMA prices showed.
Italian Debt
Italian Prime Minister Silvio Berlusconi’s offer to resign on Nov. 7 triggered questions about who will lead the nation and left it struggling to produce a government stable enough to deliver austerity. Lucas Papademos, the former vice president of the European Central Bank, was named to lead a Greek unity government charged with securing financing to avert the country’s economic collapse.
At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece, Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and eighth-biggest economy.
Geithner said Europe is making progress with a “good framework” and he encouraged them to do more.
“That basic framework is a good framework but it needs to be put in place with the speed that markets require and with the force necessary to restore confidence and they’re moving ahead,” Geithner said. “We just need to see them move more quickly and with more force behind it.”
Lael Brainard, U.S. Treasury undersecretary for international affairs, said on Nov. 9 that Europe must speed up construction of a “firewall” to protect countries that have sound policies.
U.S. Exposure
The U.S. exposure to Italy is far greater than Greece. U.S. financial institutions’ direct loans to borrowers in Italy totaled $36.7 billion, compared with $232.3 billion in other types of indirect exposure, according to Bank for International Settlements data. At the same time, U.S. banks had total direct risk to Greece of $7.32 billion as of December and indirect commitments of $34.1 billion, BIS data show.
Failure to restore order to Italy may lead it to join Greece, Portugal and Ireland in seeking outside help. The first port of call would likely be the 440 billion-euro European Financial Stability Facility. A country can now tap a precautionary promise of support of up to 10 percent of its gross domestic product -- about 160 billion euros in Italy’s case.
China’s Currency
Geithner also encouraged China to allow its currency to strengthen.
“This process of rebalancing will be aided by exchange rate policies in China and other Asian economies that allow their currencies to adjust in response to market forces,” he said. “China, in particular, must continue to allow its currency to strengthen, and China has acknowledged the importance of faster exchange rate adjustment.”
The APEC finance ministers said in a communiqué that they are committed to moving “more rapidly” toward market- determined exchange rate systems and will increase currency flexibility to reflect their economic fundamentals.
The Obama administration contends that China’s currency is undervalued and has pushed it to allow the yuan to strengthen faster. President Barack Obama has pressed Chinese leaders to take steps to boost domestic consumption to reduce lopsided global trade and investment flows.
bloomberg.com
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