Treasury Secretary Timothy Geithner bluntly told European governments on Saturday to eliminate the threat of a catastrophic financial crisis by teaming up with the European Central bank to boost the continent's bailout capacity.
Geithner, in his most explicit language to date, said fiscal authorities should work more closely with the ECB to ensure that euro-area governments with sound policies have access to affordable financing and to ensure that European banks have adequate capital and liquidity to weather the crisis.
The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally. Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe, Geithner said.
The U.S. Treasury chief has been lobbying for weeks for European officials to leverage their 440 billion-euro ($603 billion) European Financial Stability Fund through the ECB to increase its capacity. His statement suggests that he wants Europe to employ the ECB's balance sheet in the same manner as the Federal Reserve did with Treasury capital during the 2008-09 financial crisis.
The Treasury in 2008 pledged $20 billion in capital to allow the Federal Reserve to lend $200 billion to restart credit markets frozen by the financial crisis.
Geithner said that because inflation risks were largely less acute, some central banks had room to further ease policy, keep rates lower longer and slow the pace of expected tightening.
He and Federal Reserve Chairman Ben Bernanke met on Friday with top officials from the European Central Bank and some national central banks from Europe, in part to discuss international financial regulatory reform.
Geithner said U.S. growth needed additional support from the Obama administration's $447 billion tax-cut and spending package to boost jobs growth. Without this, fiscal policy would shrink too quickly and likely cause U.S. growth to be below potential in 2012.
Fiscal policy everywhere has to be guided by the imperatives of growth, he said.
Geithner also said that the IMF is still falling short in assessing exchange rate policies and should itself be subject to more scrutiny.
The Fund's surveillance would benefit from the publication of an External Stability Report that provides a frank assessment of exchange rate misalignment and excessive reserves accumulation and progress being made in reducing global imbalances, Geithner said. We call on the IMF to set forth a strong and comprehensive set of proposals to address these deficiencies.
(Reporting by David Lawder; Editing by Andrea Ricci)