By Steven K. Beckner
Federal Reserve Chairman Ben Bernanke did not attend. Instead,
Yellen represented the Fed.
Although Geithner was focusing on the European debt crisis and the
“significant risk” it poses to the global economy, back home the U.S.
economy has been limping, with unemployment officially at 9.1% and
unofficially much higher.
Looming in the background is mounting concern that the
fast-growing Chinese economy may be headed for a dramatic slowdown.
Ahead of the meetings, financial market jitters were eased somewhat
when Slovakia became the last of the 17 euro-area nations to ratify a
Euro 440 billion bail-out fund known as the European Financial Stability
Facility which was agreed upon at a July 21 EU leaders summit.
But there were also less encouraging developments. The debts of
Italy, Portugal and Spain were downgraded. And major European banks
asserted their unwillingness to accept a write-down of Greek debt larger
than the 21% agreed upon in July.
Adding to the whirl of speculation were proposals by the IMF 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.
Meanwhile, Brazil, China and other emerging market countries have
expressed willingness in helping to fund an IMF-sponsored “special
purpose vehicle” (SPV) to assist Europe.
But such proposals have gotten little support from either Europe or
the United States. Geithner suggested that Europe and the IMF, which is
already involved in lending to Greece, have plenty of money and don’t
need to be supplemented. Implicitly, he was also saying that the U.S. is
not prepared to go through another politically problematic general
quota increase for the IMF.
None of these issues have really been resolved — or could be
resolved — by the G20 policymakers at their latest of many meetings.
Beyond providing yet more exhortation for Europe to move quickly and
decisively to resolve its debt crisis, these Paris meetings have not
been of great consequence. The real decisions will made at an Oct. 23
European leaders’ summit in Brussels. That will be followed by a Nov.
3-4 G20 leaders summit in Cannes, France.
Yellen has not been available for comment. But the Fed’s views
are known to be not notably different from those of Treasury. Both Fed
and Treasury are quite concerned about the situation in Europe.
Even though direct exposure of American banks to Greece and other
Southern European debtor nations is fairly limited, U.S. banks and other
financial institutions, particularly money market funds, have
considerable exposure to European banks, which in turn are big holders
of European government bonds. The French banks are the biggest areas of
concern.
If Greece defaults, the fear is that the debt instruments of Italy,
Spain and others could come under heavy selling pressure, driving their
borrowing costs sharply higher and risking heavy losses to banks which
hold those bonds. The spillover to U.S. financial institutions could be
substantial. And the likely ensuing European economic slowdown, not to
mention the upward pressure on the dollar that could result from an
unravelling of the euro-zone, could damage U.S. exports considerably.
Bernanke made known his fears in Oct. 4 testimony before the
Congressional Joint Economic Committee. He cited the European crisis as
one of the big downside risks facing a struggling U.S. economy and
joined in Geithner’s call for action.
“Concerns 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. If the latter, whether it
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.
The G20 communique backed the IMF’s role in the crisis without
backing additional resources beyond those already agreed upon in the
recently completed 14th quota review.
“As a contribution to a more structured approach, we called on the
IMF to further consider new ways to provide on a case by case basis
short-term liquidity to countries facing exogenous, including systemic,
shocks building on existing instruments and facilities and called on the
IMF to develop concrete proposals by the Cannes Summit,” it said.
“In addition, we recognize that central banks play a major role in
addressing global liquidity shocks,” the communique said. ” We committed
that the IMF must have adequate resources to fulfill its systemic
responsibilities and look forward to a discussion of this in Cannes.”
“We call for the full implementation of the 2010 quota and
governance reform of the IMF, as agreed. We look forward to making
progress by the Cannes Summit on a criteria]based path to broaden the
SDR basket, as a contribution to the evolution of the IMS, based on the
existing criteria,” it added.
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** Market News International Paris **
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