WASHINGTON (MNI) – The following is the second section of the text
of Treasury Secretary Tim Geithner’s testimony prepared for the House
Financial Services Committee for delivery Tuesday morning:
This mix of economic reform and financial measures has helped calm
financial tensions. The cost of borrowing has fallen sharply for Italy
and Spain. Concerns about bank funding problems have eased. But Europe
is still only at the initial stages of what will be a long and difficult
path of reform.
The most important unfinished piece of the broader financial
strategy is to build a stronger European firewall to provide a backstop
for the governments undertaking reforms. The existing 440 billion
European Financial Stability Facility (EFSF) has made commitments
totaling 192 billion. Europe’s leaders have decided to establish
another fund called the European Stabilization Mechanism (ESM) to
succeed the EFSF starting in July 2012. They are in the process of
reviewing options for expanding the combined financial capacity of these
funds so that they can make clear to financial markets that they have
the financial resources available on a scale that is commensurate with
future needs in the event the crisis were to intensify.
The European financial crisis has already caused significant damage
to economic growth in the United States and around the world, and we
have a strong interest in a successful resolution of the crisis.
The Euro Area accounts for about 18 percent of global GDP. It is a
major source of financing for many emerging economies. It accounts for
about 15 percent of U.S. exports of goods and services, but a larger
portion of exports of many or our trading partners. When growth slows in
Europe, it affects growth around the world. And when the fears of a
broader European crisis have been most acute, as they were in the summer
and fall of 2011 and during the spring and summer of 2010, financial
markets fell around the world, damaging confidence and slowing the
momentum of the global recovery.
Our financial system has relatively little exposure to the five
European economies at the heart of the crisis, but we have significant
financial and economic ties to Germany and France and the continent as a
We have worked very closely with Europe’s leaders over the past two
years, and with the members of the IMF, to help support a stronger
European response to the crisis.
The Federal Reserve’s dollar swap lines with the ECB, the Bank of
Canada, the Bank of England, the Bank of Japan, and the Swiss National
Bank have played a critical role alongside the ECB’s direct efforts.
European banks borrowed heavily in dollars before the crisis, and many
lost the ability to borrow in dollars as the crisis intensified. The
Fed’s swaps made it possible for Europe’s banks to borrow dollars from
their central banks, which has helped avoid a more rapid deleveraging,
reducing the impact on financial conditions in many countries where
European banks had lent heavily.
The IMF has also played an important role in Europe. The IMF has
provided advice on the design of reforms, a framework for public
monitoring of progress, and support for programs in Greece, Ireland, and
Portugal in partnership with Europe, which has assumed the majority of
the burden. These actions have helped limit the damage from the crisis
to the United States and to economies around the world.
It is in the interest of the United States that the IMF is able to
continue to play a constructive role in Europe. IMF resources cannot
substitute for a strong and credible European firewall and response, but
they can help supplement the resources Europe mobilized on its own.
The IMF has substantial financial resources available today, and it
has the ability, as it has demonstrated in the past, to mobilize
temporary resources if that were necessary to help contain the damage
from a further intensification of the crisis in Europe. For these
reasons, we have no intention to seek additional U.S. resources for the
IMF. The IMF has played a critical role in every major post-war
financial crisis, while consistently returning to the United States and
other IMF members any resources – with interest – that it has
temporarily drawn upon.
We are encouraged by the progress that our European colleagues have
made over the last few months. We hope they are able to build on these
efforts in the coming weeks and months to put in place a more durable
foundation for financial stability and economic growth. We do not want
to see Europe weakened by a protracted crisis. We will continue to work
closely with them, and with the IMF, to facilitate further progress.
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** MNI Washington Bureau: 202-371-2121 **