By Steven K. Beckner

PARIS (MNI) – For U.S. Treasury Secretary Timothy Geithner and
Federal Reserve Vice Chairman Janet Yellen, who have been wrestling with
economic weakness, fiscal recklessness and financial volatility at home,
coming to this weekend’s Group of 20 finance meeting might almost seem
like a vacation from their problems — except that Europe’s problems are
America’s too.

But at least Geithner and Yellen have the luxury of representing a
country not directly involved in the European debt crisis whose currency
is still the world’s numeraire. They can play the role of rich, if not
always welcome, uncle — spouting advice to the Europeans on how to
proceed, something the Treasury Secretary has been abundantly willing to
do.

Geithner has been more hortatory than avuncular in recent months as
he has pushed European policymakers to be more aggressive in resolving
their financial difficulties. He is expected to continue his urgings
here.

These meetings of G-20 finance ministers and central bankers, which
are being held in preparation for a Nov. 3-4 G-20 leaders’ summit in
Cannes, France, are just the latest in a series of high-level
discussions aimed at resolving the dilemma posed by Greece’s deep debt
troubles.

Before Cannes, the EU leaders will have held another, even more
crucial summit on Oct. 23 in Brussels. By then, if far-reaching,
concrete steps have not been taken to avert it, catastrophe looms
in the minds of many market participants.

If it was only Greece, the agonizing would not be as great, but
the fear is that a Greek debt default, or a write-down of its bonds
exceeding the agreed-upon 21%, would not only undermine French and other
banks, but could also set off a chain reaction in other southern
European nations as those countries’ bonds plunge in value and spike
their debt service costs.

That scare was heightened last week when the debt of Italy and
Spain was downgraded by ratings agencies.

The survival of the euro-zone itself, as a single currency compact,
could be at stake, anxious observers warn.

At a July 21 summit EU leaders agreed to enhance the scope of their
440-billion euro bail-out fund, dubbed the European Financial Stability
Fund, but as events raced ahead, it soon became evident that the fund
would be insufficient standing alone.

In advance of the annual meetings of the International Monetary
Fund and World Bank in Washington, G-20 policymakers called on the
euro area to implement measures to “increase the flexibility of the EFSF
to maximize its impact in order to address the contagion” by the time of
this weekend’s meeting.

The G-20 declared that the world economy was facing “heightened
downside risks from sovereign stresses, financial system fragility,
market turbulence, weak economic growth and unacceptably high
unemployment.”

The idea is to somehow leverage the 440-billion euro fund into
something much larger, by borrowing against it, to enable the EFSF to
buy sovereign debt and recapitalize banks.

But just getting an enhanced E440-billion euro EFSF ratified by the
17 euro-area parliaments has proven a challenge.

Although the German Bundestag and, most recently, Slovakia, have
approved the measures, popular support for aiding Greece and others is
dodgy. The idea of funnelling money to the banks through a recalcitrant
Athens does not appeal to many Germans.

To the consternation of some, Greece has been given the go-ahead
for a further 8-billion-euro bailout tranche from the 110-billion
rescue package put together by the IMF, the European Comnmission and the
European Central Bank in May 2010, even though it has failed to meet
promised budget deficit reduction targets.

A second 109 billion euro bail-out fund for Greece is also in the
offing.

Meanwhile, the ECB has been straining its capacity — and its
political support — by purchasing Italian, Portgugese and Spanish
debt in an only partially successful effort to keep a lid on those
nations’ borrowing costs.

The ECB plans to buy 40 billion in mortgage backed bonds. And it
has announced that it will lend to banks up to 13-month fixed
rate credits.

Concern is growing among Germans and others that the ECB, which
they were promised would be a hard money successor to the Bundesbank, is
now being debauched to support what they see as fiscal miscreants.

If Commission President Jose Manuel Barroso gets his way, common
“eurobonds” would be authorized, allowing all 17 member countries to
borrow at a common rate — alleviating the wide yield spreads between
the likes of Greece and Germany. But this idea has not won the backing
of Germany’s Chancellor Angela Merkel.

(Continued In Part 2)

–London Bureau; Tel: +442078627492; email: sbeckner@marketnews.com

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