For its part, the IMF, ever eager to expand its portfolio, has
floated proposals to buy European bonds and to offer new short-term
credit lines to fiscally challenged member governments, in addition to
the long-term loans it is already making.

Against this complex and constantly changing backdrop, Geithner has
been vocal in sending urgent messages from his Washington perch at every
opportunity. In recent weeks he has hammered away at European
authorities, urging them to “do more” to get a grip on the debt crisis.

Geithner has not only urged an effective expansion of the EFSF, he
has called for EU governments to work more closely with the ECB, to
backstop their banks and to bring down borrowing costs.

At the time of the IMF meetings, Geithner said EU leaders needed to
act “much more quickly” and lamented that ECB actions had been
“substituting for” the actions of governments.

The former president of the Federal Reserve Bank of New York said
that “one of the reasons why it is so important for the governments to
escalate is so that they do not leave the central bank carrying too much
of the burden of responding to a crisis.”

Geithner said the alleged absence of government and central bank
cooperation had “undermined what they’ve been trying to build.”

There were unconfirmed reports that Geithner was pushing to make
the ECB guarantee the bonds issued by euro area governments.

In Oct. 6 testimony before the Senate Banking Committee, he said
the European debt crisis poses “a significant risk” to the U.S. and
global economy, even while saying that U.S. financial firms “are in a
much stronger position” than their European counterparts.

Yellen will be filling in for Chairman Ben Bernanke, but is likely
to reflect his views on the EZ debt crisis and on the global situation.

Bernanke has been much less vociferous, but is believed to have
supported Geithner’s positions at past G-20 and other meetings.

Testifying before the Congressional Joint Economic Committee on
Oct. 4, Bernanke cited the European crisis as one of the downside risks
facing a struggling U.S. economy and joined in Geithner’s call for
action.

“(C)oncerns about sovereign debt in Greece and other euro zone
countries, as well as about the sovereign debt exposures of the European
banking system, have been a significant source of stress in global
financial markets,” said Bernanke. “European leaders are strongly
committed to addressing these issues, but the need to obtain agreement
among a large number of countries to put in place necessary backstops
and to address the sources of the fiscal problems has slowed the process
of finding solutions…”

Responding to questions about the potential impact of a Greek
default, Bernanke said it would depend on whether it took place in an
orderly or disorderly and unplanned way and so triggered defaults by
other countries.

If there were a disorderly default, that led to defaults of other
EU sovereigns or stresses on European banks, Bernanke said this would
create “a huge amount of financial volatility globally that would have a
very substantial impact not only on our financial system but on our
economy.”

“So it is a very, very serious risk if that were to happen,” he
added.

This is why it is very important that European authorities continue
efforts to tackle the sovereign debt crisis, he said, describing the
obstacles they face as more political in nature than economic.

EU leaders must be pushed to move aggressively to “put this behind
us,” Bernanke said, because even the current uncertainty has been a
negative for the U.S. economy.

As for whether the ongoing turbulence in Europe could have
significant repercussions for the U.S economy, Bernanke described the
exposure of U.S. banks to the most troubled Eurozone sovereigns —
Ireland, Portugal and Greece — as “quite minimal.”

The direct exposures for banks are not large, he said, although
they are somewhat larger for money market mutual funds. However, they
have mostly moved away from the troubled sovereigns to countries like
France and Germany.

“So it isn’t so much the direct exposures that concern me, rather
… market uncertainty about the resolution of the Greek situation,
about the broader resolution of both sovereign debt issues and the
European banking issues has created an enormous amount of uncertainty
and volatility in financial markets,” Bernanke said.

“It is through that volatility — an indirect effect I think —
that we are being affected now,” he continued. “I believe that one of
the reasons our recovery has been slower this year, than it was last
year, is that we’ve faced a lot of financial volatility and some of that
is coming from the European situation.”

The Fed has already revived dollar swap lines with the ECB to make
dollar liquidity available for European banks facing potential funding
problems.

This past Sunday, French President Nicolas Sarkozy and German
Chancellor Angela Merkel vowed that a “comprehensive response” to the
European debt crisis will be put in place by the end of October.
Although no specifics were provided, the package was said to include
recapitalization of European banks and greater budgetary coordination
among the 17 euro-zone nations, the lack of which has proven to be the
critical flaw in the 12-year old single currency set-up.

Their pronouncement was greeted with a mixture of hope and
skepticism.

Realistically, Geithner and Bernanke cannot expect a lot to be
accomplished here in Paris. They can only hope to build some momentum
toward the Brussels and Cannes summits — and hope that things don’t
unravel in the meantime.

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

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