Obviously the big news from Europe over the weekend was the exiling of Timaaaayyy! Anyone who has read Andrew Ross Sorkin’s account of the US GFC bailouts, Too big to fail (or seen the movie), will know that Tim Geithner is the ultimate pragmatist. From his position as the head of the New York Federal Reserve, Geithner promoted policies of bail first and ask questions later. I suspect he had little choice once the crisis hit, certainly in a political sense, but that certainly isn’t an excuse for the many years leading up to the crisis. Europe obviously sees it that way:
European finance ministers ruled out efforts to prop up the faltering economy and gave no indication of providing aid for lenders to go along with yesterday’s liquidity lifeline from the European Central Bank (ECB).
Clashing with US Treasury Secretary Timothy Geithner, finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.“We have slightly different views from time to time with our US colleagues when it comes to fiscal stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing today’s trans-Atlantic finance meeting in Wroclaw, Poland. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.”
The real issue for Mr Geithner is that his Euro-TALF plan focussed on the ECB doing even more heavy lifting by using the EFSF as collateral on new loans. If he had been listening he would have realised that a German-led Europe is against using their central bank for this type of operation. That point was re-emphasised after the meeting by the German Finance minister:
German Finance Minister Wolfgang Schaeuble said policy makers shouldn’t resort to using the European Central Bank to boost the European Financial Stability Facility’s lending capacity.
“Regarding leveraging, it depends on what is meant by that,” Schaeuble told reporters in Wroclaw, Poland, after a meeting of European Union finance ministers and central bank governors. “One thing is clear, and I have said that in other circumstances, most recently at our G-7 meeting in Marseille: we don’t think that real economic and social problems can be solved by means of monetary policy. That has never been the European model and it won’t be.”
With no eurobond instrument, no TALF , no talk of EFSF expansion and a politically hamstrung ECB it seems that European leaders think that they have the capacity to handle the crisis under their existing frameworks. Given the response of the Greek PM this may have come as a bit of a surprise to him:
A few hours ago Timothy Geithner was in Poland promoting his plan for a EuroTARP, while Greek PM George Papandreou was preparing to fly to New York for meetings with the U.N. and the IMF.
But something went wrong. Geithner’s meeting ended in discord with no pledge to recapitalize banks.
Papandreou canceled his trip after talking to Finance Minister Evangelos Venizelos, who had been in Poland with Geithner, planning instead to return to Greece.
“The prime minister judged that he should not be away. He wants to ensure that all of Greece’s commitments (to its European Union partners) are fulfilled,” government spokesman Ilias Mossialos told Reuters.
We are now staring down the barrel of Ms Merkel’s “managed” default. Mr Geithner’s “catastrophic risk” statement makes it clear. I am really struggling to see any other alternative at the moment and from all the other commentary I have read over the weekend I think most other people are as well. I note that former IMF chief has added his opinions around that point this morning:
The former International Monetary Fund’s Managing Director, Dominique Strauss Kahn, Sunday said Greece is unable to pay its debt and its creditors will have to take losses on the debt they hold.
“Greece got poorer, we can say Greeks will pay on their own, but they can’t,” Strauss Kahn said in an interview on French TV channel TF1. “There is a loss and it must be taken by governments and banks,” he said.
“Governments haven’t solved the problem, they just delayed it, and the snowball grows,” the former chief of the IMF added in his first comments since stepping down from his post.
If Greece defaults then the European banking system is going to see considerable losses. The ex-UK Prime Minister Gordon Brown has joined the IMF in the opinion that it isn’t prepared for what is coming:
European banks are “grossly under- capitalized” and the debt crisis is more serious for the region than the 2008 meltdown as governments are constrained by fiscal pressures, former U.K. Prime Minister Gordon Brown said.
“In 2008, governments could intervene to sort out the problems of banks,” Brown said at the World Economic Forum in the Chinese port city of Dalian today. “In 2011, banks have problems, but so too do governments.”
Brown said that while the ECB is part of the short-term solution, it needs additional assistance.
The European Financial Stabilization Mechanism, which is run by the European Union’s 27-nation executive arm, is “not enough,” Brown said. “Substantially more resources” are required, including from the International Monetary Fund and lenders including China, he said.
“The euro area problem is now moving to the center,” Brown said. “The euro cannot survive in its present form, it’s going to have to be reformed dramatically. We are I think at an hour to midnight in the way that we look at this issue.”
Apart from a few of the Euro-Elite and some banking chiefs I don’t think anyone is denying that the European banks need help. Their use of private deals for $US funding at high rates clearly demonstrates the strain they are under.
Under a Greek default, I have no doubt that many European banks will fail without national intervention. I am sure Tim is well aware of that as well. Given that Europe seems to have no appetite for extending any type of intervention it seems likely that under these conditions the EU would let banks fail into some form of nationalisation. That is, take the exact opposite path to the US.
I have my suspicions that is the real reason Mr Geithner went to Poland.