–No Chance Major EU Countries Will Let Their Banks Be At Risk

NEW YORK (MNI) – U.S. Treasury Secretary Timothy Geithner Wednesday
sought to allay mounting concerns over the crisis in Europe, saying the
EU does have the capacity to tackle problems stemming from its debt woes
and its leaders understand they must demonstrate the political will to
earn back the confidence of investors.

“This is their challenge, and they have the economic and financial
capacity,” Geithner said in remarks at the “Delivering Alpha” conference
organized by CNBC and Institutional Investor in New York.

“The people who are concerned that this is beyond their grasp are
mistaken. The size of the challenges they face financially,
economically, are completely within the capacity of the stronger
European members to manage,” he said.

As for concerns about Greece possibly defaulting, Geithner urged
patience, saying “it takes time.” Greece must be allowed time to
implement its reforms, he said, as well as the capacity and “breathing
space” to borrow.

Geithner said the U.S. has a “huge interest” as a country in Europe
solving its crisis, calling the situation faced by EU authorities “very
challenging.” They are attempting to solve many problems at once,
including building a more complete fiscal and financial monetary union,
he said, while at the same time facing “a terrible growth problem.”

Despite these challenges, Geithner said Europe’s leaders are
“absolutely committed” and possess both the financial and economic
capacity to do what it takes “to hold this thing together.”

The U.S. is also providing assistance anyway it can, he continued,
noting the Federal Reserve is being as supportive as possible in helping
the European Central Bank and national central banks meet dollar funding
needs.

EU authorities are also aware of the fact they have been behind the
curve and will have to do more to establish credibility in the eyes of
the world, he added.

“They recognize it’s going to take more force behind their
commitments to make sure that Italy and Spain can fund at sustainable
interest rates, that the countries undertaking these reforms in Greece,
Ireland and Portugal have the financial support they need,” Geithner
said.

Most importantly, the Treasury secretary said EU authorities
understand they must make it clear they will stand behind their
financial systems.

Europe has a long history of support for its banks, Geithner said,
and “there is no chance that the major countries of Europe will let
their institutions be at risk in the eyes of the market.”

As for concerns about the extent of U.S. banks’ exposure directly
or indirectly to EU sovereign debt, Geithner emphasized that the current
crisis is “overwhelming a European challenge.”

While Europe’s debt woes are adding to an ongoing sense of caution
around the world, Geithner said the U.S. financial system is in a “much
stronger position to deal with these new risks in the world than it was
before this crisis.”

Still, the U.S. has a big interest in aiding Europe and will do
everything it can, he said. “This is a big enough thing to matter for
the rest of the world.”

“You have to use overwhelming force” during a financial crisis,
Geithner said, a message he will likely take to the meeting of Europe’s
Economic and Financial Affairs Council in Wroclaw Poland on Friday.

“You have to have a clear, unequivocal, unified committment to do
whatever it takes to solve it,” Geithner added. “You have to be open and
honest about the scale of the challenges, make sure that investors
around the world have the capacity to make judgements, differentiate
across institutions and have an incentive to provide the funding you
need for economies to function.”

Geithner noted that despite the U.S. government’s success in
dealing with its own financial crisis, “we have a lot of challenges
ahead, very difficult challenges ahead.”

The U.S., he warned, is still living with the scars of that crisis.
Growth has been weaker than hoped for and remains vulnerable, due to a
combination of a still healing economy and shocks such as oil prices,
the earthquake in Japan and the EU debt crisis.

In addition, “You’ve had this terribly damaging political
dysfunction here and in Europe that leaves the world wondering whether
the political system has the capacity to do the right thing,” Geithner
said.

Such political wrangling is very damaging to confidence and its
devastating effect has been witnessed in the United States, he said.

“Ultimately you have to put the economy ahead of politics, and you
have to put the imperatives of growth — not just immediate growth but
long-term growth fundamentals — ahead of political considerations,” he
said.

This is why there is no reason for Congress not to help the economy
and boost growth by passing President Obama’s $447 billion jobs bill,
Geithner said, calling it “the most prudent thing to do.”

He said U.S. economic growth will be weaker without a bold jobs
package, and the bill submitted by Obama to the Hill acts as insurance
for growth.

Geithner also warned against cuts in spending that would result in
a more steeper-than-needed fiscal contraction, as the U.S. has a ways to
go before the damage from the financial crisis is healed.

The administration has included tax provisions to pay for the jobs
package, most of which take away tax deductions for the wealthy.
Geithner said it makes sense to make “modest” changes in tax benefits
that go to the wealthiest of Americans as it poses the least risk to
growth.

The other option would be to make deeper cuts in basic benefits
that the majority of Americans rely on, he said, and that would
undermine growth.

One drag on growth that is no longer a concern is oil prices, with
Geithner saying the price of oil is currently being driven by
fundamentals and will ease the pressure on the recovery. The low level
of oil prices is much less likely to be a constrain on growth and
constrain the activities of central banks around the world, he said.

Asked to respond to continued calls for the administration to allow
companies to repatriate profits to the U.S. at a reduced tax rate,
Geithner said “we will propose ways to strengthen incentives to bring
that money back” within the context of comprehensive tax reform.

The important goal is to use tax reform to improve incentives to
“build and create” products in the U.S., he said, declaring that the
nation is “much better positioned” and diversified to take advantage of
boom in emerging market economies.

** Market News International Washington Bureau: 202-371-2121 **

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