STAFF NEWS & ANALYSIS
Geithner Expresses Confidence in EU Measures
By Staff News & Analysis - March 10, 2011

US Treasury Secretary Timothy Geithner (left) on Tuesday expressed confidence in European Union (EU) measures aimed at shoring up confidence in the euro. Speaking following talks in Berlin with German Finance Minister Wolfgang Schaeuble, Geithner also said the global economy was gradually recovering. The Treasury Secretary said he was convinced the European authorities would strike 'the right balance between support for the reform programmes that are necessary to address their problems' and the type of financial support necessary to make those reforms work. Geithner went on to praise what he described as the 'incredibly difficult reforms' that European governments were undertaking. He said the EU was doing a 'remarkable' job of forging mechanisms to manage future economic problems. 'I think there is a broader recognition across Europe that, for those reforms to work, they need to be supported by carefully designed conditional financial systems,' Geithner said. Leaders of the 17-member eurozone are due to hold meet on Friday as part of efforts to overhaul their economies to enable them to compete more with global rivals such as the US and China. The leaders are also set to debate plans to set up a permanent bailout system for eurozone countries which run the risk of bankruptcy. Both Greece and Ireland were forced to turn to tap the bailout fund as a result of the debt crisis that engulfed the currency bloc last year. – Monsters and Critics

Dominant Social Theme: It will all end well.

Free-Market Analysis: Timothy Geithner seems confident that the EU will resolve the current sovereign debt crisis but we wonder if this confidence is misplaced. The Anglo-American power elite is struggling on many fronts these days as it apparently strives more energetically than ever to generate closer international governance. The EU has always been central to these plans but the euro itself is increasingly under threat.

Alternatively one could argue that part of the effort to speed up the process of world government is simply to introduce chaos by whatever means possible. Looked at from this angle, a euro-failure would simply add to currency confusion and further the argument for a single, worldwide currency such as the one the IMF is trying to introduce via SDRs. But in this article, we want to focus on the continued – protracted – unraveling of the euro itself. It is a huge story, though it is not being reported as such by the mainstream media.

One can see in Geithner's comments the efforts by the powers-that-be to minimize the crisis. It is, however, an intractable one, with no end in sight. Observers not directly involved with the politics of the Eurozone admit as much. As reported in a recent Reuters article, billionaire investor George Soros has many unkind things to say about the prospects of the euro.

From Paris, Soros addressed a breakfast meeting – Reuters reported – saying that EU leaders were not taking the actions they needed to take to ameliorate the situation. He made the point that the concentration remained on pressuring Irish and Greek taxpayers to shoulder the burden of larger Euro-bank insolvencies. The result is that the big issue of restructuring of Greek and Irish debt is not being addressed. He said it was inevitably putting in place a "two-speed Europe."

Soros pointed out there was a new regime in Ireland that had come to power based on the idea of redoing the terms under which Ireland had borrowed money from the EU to prop up its own banks. If Irish banks go under, French and British banks especially take significant financial losses. But Soros stated that the pressure to make bondholders share losses with taxpayers might soon become irresistible. Chances are this pressure will affect Greece as well. Soros then made a startling statement: "It is in fact pretty unfair that taxpayers should be absorbing those losses and not bondholders."

This sounds like the beginning of a belated recognition that the EU's initial reaction to Southern Europe's sovereign debt crisis is probably not going to stick. The idea of course was that a financial crisis – which the socialist leaders of the EU knew was a certainty sooner or later – would drive closer political accords. From our point of view, the Internet and the additional information it's made available – has put paid to that certainty. Too many Europeans especially in the South are aware of the massive deceptions that have taken place in building the EU. They're aware as well that taxpayers are facing the burden of paying to ensure that bondholders or insolvent banks stay whole. Anger is building; the crisis itself is swelling once again.

In his most recent article, EU Paralysis Drives Fresh Bond Rout, the UK Telegraph's Ambrose Evans-Pritchard points out that the threat of an ECM rate hike plus lack of any compromise over an expanded bailout fund with more lenient terms is continuing to aggravate the problems of the EU's overall fiscal stance. The issues express themselves monetarily but they are primarily political. German voters – informed by the same Internet as Southern ones – are furiously determined that their euros will not pay for PIGS profligacy. Irish and Greek populations, already pushed to the limit by austerity, are increasingly determined that they will not make the payments their governments have negotiated for them.

Now, the contagion is spreading to Portugal and even to Spain, which only a few weeks ago looked better positioned to avoid tapping the EU bailout fund. Portugal, Evans-Pritchard points outs, "edged closer to the brink yesterday, having to pay almost 6pc to raise two-year debt. The yield on 10-year bonds briefly surged to 7.8pc after the Chinese rating agency Dagong downgraded the country's debt to BBB+."

What do Portuguese financiers think of the trend? "These levels of interest rates are not sustainable over time," said Carlos Costa Pina, secretary of the Portuguese Treasury. He blamed the bond market edginess not on anything Portugal had done but on the political deadlock within the EU itself. "Portugal needs urgent measures by the EU to restore market confidence."

Evans-Pritchard quotes David Owen from Jefferies Fixed Income as saying that the pre-emptive statement by the ECM that it was raising rates "effectively doomed" Portugal. "The ECB by its actions has made it inevitable that Portugal will need a bail-out. There are parallels with the actions of the Bundesbank during the ERM crisis in 1992." Strong words. Worse still: "Spain is not yet safe. It has €2.5 trillion of combined household and company debt. That is an awful lot."

The three blocs of Chancellor Angela Merkel's Bundestag coalition have written down their demands that she resist any concessions on a debt union. Germany's constitutional court is soon to rule on the legality of the current EU bailout fund, and if Merkel does anything to aggravate the situation (agree to some sort of expanded bailout) the verdict could well turn against her along with the increased wrath of public opinion.

Of course, the Greeks and Irish are just as angry as the Germans. The Irish just threw out the government that had agreed to the current austerity formula, and the rejection was so complete that the party itself may not be a factor in Ireland for years to come. The Greeks continue to riot and to exercise acts of civil disobedience. The perspective is that the South is paying for the sins of their own elite and to compensate European banks and bondholders for losses they rightly should be taking themselves. There is no moral center; any certitude among Eurocrats that an economic crisis would drive a political solution must be long vanished.

There are presumably solutions to the current crisis, mainly conceding that banks and bondholders will have to shoulder the losses that are rightfully theirs. But in such cases, banks presumably would have to be recapitalized; someone will have to pay for that recapitalization. Any attempt to make it a Euro-wide responsibility will surely be met, once again, with Northern (German) fury. This means French and British taxpayers will end up paying for their banks' profligacy.

After Thoughts

British voters are entirely disenchanted with the EU and the chances are the French will not take kindly to being taxed for banks' foolhardiness. The alternative, then, is that French and British banks (apparently these hold the bulk of the bad bonds) will begin to crumble, putting the very foundations of the Euro-recovery in jeopardy. A "double-dip" would surely result, putting even more strain on the already fracturing EU one-size-fits-all currency solution. The footsteps grow louder.

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