U.S. Treasury Secretary Timothy Geithner and German Finance Minister Wolfgang Schaeuble backed a commitment by European leaders to do everything needed to defend the euro area while failing to mention its weakest link, Greece.
In a joint statement issued after they held talks on the German North Sea island of Sylt, Geithner and Schaeuble “took note” of comments made last week by European leaders to “take whatever steps are necessary to safeguard financial stability” in the 17-nation currency area.
The two officials welcomed Ireland’s sale of bonds and Portugal’s “continued success in meeting program commitments,” and discussed the “considerable efforts” made by Spain and Italy “to pursue far-reaching fiscal and structural reforms.” They didn’t refer to Greece, where international creditors are reviewing the government’s progress.
The talks signaled U.S. endorsement for European Central Bank President Mario Draghi as he seeks a game changer in the battle against Europe’s sovereign debt crisis almost three years after it surfaced in Greece. Geithner is due to conclude his one-day trip to Germany later Monday by meeting with Draghi in Frankfurt.
Spanish bonds extended a rally and European stocks rose to the highest level since April amid speculation that Draghi will succeed in building consensus among governments and central bankers for a plan to ease borrowing costs in Spain and Italy before ECB policy makers convene on Aug. 2. The euro fell against the dollar for the first time in four days.
Draghi’s proposal involves Europe’s rescue fund buying government bonds on the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, two central bank officials said July 27 on condition of anonymity. Further ECB rate cuts and long- term loans to banks are also up for discussion, one of the officials said.
Leaders in Berlin, Paris and Rome have already tacitly endorsed Draghi’s approach, echoing his language in saying they will do what’s needed to protect the euro. Draghi must now deliver or face a renewed selloff on bond markets where Spanish and Italian yields reached euro-era records this month, fueling speculation the monetary union could fall apart.
“We have reached a decisive point,” Jean-Claude Juncker, who heads the group of euro-area finance ministers, told Germany’s Sueddeutsche Zeitung in an interview. “The world is talking about whether there will still be a eurozone in the next few months. We have to make abundantly clear with all available resources that we’re completely determined to guarantee the financial stability of the currency.”
Juncker confirmed that the temporary bailout fund, the European Financial Stability Facility, is working with the ECB on a plan to reduce borrowing costs, adding “we have no time to lose,” the newspaper reported.
In Athens, representatives of Greece’s international creditors — the ECB, the European Commission and the International Monetary Fund — may extend their visit until the government has completed work on a two-year, 11.5 billion-euro ($14 billion) budget plan, a Greek Finance Ministry official said Sunday.
Prime Minister Antonis Samaras and his coalition partners, Evangelos Venizelos of Pasok and Fotis Kouvelis of Democratic Left, are meeting again Monday to try and determine the savings required to receive the funds pledged under Greece’s two rescue packages totaling 240 billion euros.
The euro fell 0.6 percent to $1.2244 at 5:42 p.m. in Frankfurt. The shared currency gained 1.4 percent in the two days after Draghi’s July 26 pledge to do whatever is necessary, ending last week at $1.2322. Spain’s bond market staged its biggest rally in seven months, sending the 10-year yield down to 6.74 percent from a euro-era record of 7.75 percent reached on July 25. The rally continued today, with Spain’s 10-year rate dropping to as low as 6.57 percent and Italy’s to 5.88 percent.
While the ECB’s willingness to act is necessary to buy time, the central bank can’t solve the debt crisis alone, Moody’s Investors Service said.
German Chancellor Angela Merkel’s coalition partners voiced concern about renewed ECB bond purchases, underscoring the domestic difficulties she faces to win support for new measures.
“These conflicting remarks illustrate the diverging views that have dogged the euro-area authorities’ policy development and significantly contributed to the depth of the crisis,” Moody’s said in its Credit Outlook.
The biggest hurdle may be the Bundesbank, which last week reiterated its opposition to ECB bond buying, saying it blurs the line between monetary and fiscal policy. The ECB shelved its bond-purchase program in March.
Draghi has also scheduled talks with Bundesbank President Jens Weidmann, the two central bank officials said on July 27. A Bundesbank spokesman declined to say yesterday whether a discussion has taken place. An ECB spokeswoman reiterated that it’s not unusual for Draghi to speak with council members and declined to comment further.
Europe is “burning because of deep concerns about political will” in the region to resolve the crisis, Geithner said in a July 23 interview on the “Charlie Rose” show broadcast on PBS and Bloomberg Television.
In their statement today, Geithner and Schaeuble emphasized “the need for policy makers to adopt and implement all reform steps required to deal with the financial crisis and crisis of confidence,” the U.S. Treasury and Germany’s Finance Ministry said. “Both expressed confidence in euro-area member states’ efforts to reform and move towards greater integration.”
The U.S. and Germany “will continue to cooperate closely with their partners when advancing the policy agenda in autumn to further stabilize global and European economies.”
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