U.S. Treasury Secretary Timothy Geithner speaks at the Clinton Global Initiative in Chicago
Treasury Secretary Timothy Geithner speaks at the Clinton Global Initiative in Chicago, June 30, 2011. Geithner said on Thursday he plans to remain in his post for the foreseeable future. REUTERS

Treasury Secretary Timothy Geithner will discuss with European finance ministers the possibility of leveraging the euro zone's bailout fund to make it more effective in fighting the debt crisis.

Geithner will hold talks with EU ministers in Poland on Friday and will propose that the EFSF, the 440 billion euro fund set up in May 2010, be used in a similar way to an emergency fund created by the U.S. Treasury and Federal Reserve in 2008 to handle the subprime crisis, sources said.

The U.S. emergency fund served to support U.S. banks in the 2007/8 subprime crisis. In a sign of the risks to banks and the world economy associated with Europe's escalating debt crisis, the European Central Bank, the U.S. Fed and other major central banks agreed on Thursday to reintroduce three-month dollar liquidity operations in the fourth quarter.

That news sharply boosted European bank shares and the euro. Shares in French bank BNP Paribas jumped as much as 13 percent.

Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece, one EU official told Reuters ahead of the meeting in Wroclaw, Poland.

The leveraging of the EFSF -- I think this is something that he will put on the table, the official said. There could be some openness to the proposal.

The model for the Europeans would be the Term Asset-Backed Securities Loan Facility (TALF), which the U.S. financial authorities used to jumpstart the asset-backed securities market, which was frozen at the time and stalling recovery.

Under TALF, the New York Fed, where Geithner was previously president, lent out up to $200 billion, taking asset-backed securities as collateral with a haircut, and the U.S. Treasury in turn offered $20 billion credit protection for the Fed.

While it remains unclear how the EFSF could be leveraged, one analyst said its funds could be used to guarantee a portion of potential losses on euro zone sovereign debt, giving it more clout than if it just bought the bonds in the secondary market.

It is possible to leverage the EFSF so as to expand its headline capacity to support sovereign bonds, for example through the use of partial guarantees against first losses, said Sony Kapoor, managing director of think tank Re-Define.

One difficulty is that leveraging a fund that is underwritten by guarantees from euro zone member states could increase liabilities across the board, putting pressure on the triple-A credit rating of countries such as France.


Leveraging the EFSF would be a radical new approach in the crisis, with financial markets currently fixated on the possibility of the euro zone introducing jointly issued bonds, even though such a move is strongly opposed by Germany and unlikely to happen any time soon.

German Chancellor Angela Merkel again bluntly rejected such bonds as a solution to the crisis on Thursday, saying that collectivizing debts would not solve the problem.

In order to bring about common interest rates, you need similar competitiveness levels, similar budget situations. You don't get them by collectivizing debts, she said in a speech at the Frankfurt auto show.

The European Union's top economic official meanwhile said he expected international lenders to be able to recommend by the end of the month releasing a vital next tranche of aid to Greece, warding off the threat of an imminent default.

While that may keep Greece afloat until it gets a second bailout package from the euro zone, the finance minister said the country would remain mired in recession through 2012, the fourth year in a row, a contraction that is only likely to fuel popular outrage at the austerity drive.

In Washington, IMF chief Christine Lagarde urged advanced countries to take bold steps to break a cycle of weak growth and high debt that threatens the global economy.

Without collective, bold action, there is a real risk that the major economies slip back instead of moving forward, she said in a speech ahead of the IMF and World Bank meetings of global financial leaders next week.

On a conference call with Greek Prime Minister George Papandreou on Wednesday, Merkel and French President Nicolas Sarkozy voiced their support for keeping Greece in the euro zone and continuing financial assistance provided it sticks strictly to austerity measures to meet its fiscal targets.

EU Economic and Monetary Affairs Commissioner Olli Rehn said he now expected an EU/ECB/IMF troika of inspectors to complete their review of Greece's fiscal targets by the end of the month.

Separately, the Commission said economic growth in Europe was slowing down and could come close to a halt at the end of the year, partly because the debt crisis will hit household consumption and investment.

The outlook for the European economy has deteriorated. Recoveries from financial crises are often slow and bumpy, Rehn said, rejecting any return to stimulus spending.

There were some signs that political support in Germany for continuing aid to Greece was rallying after weekend comments about the possibility of a Greek default and exit from the euro area spooked markets.

Michael Meister, deputy parliamentary leader of Berlin's governing conservatives, said Athens was doing its utmost to deliver on its fiscal targets and it would be absolutely fatal for Greece to leave the euro zone.

He was also confident parliament would ratify an increased role for the euro zone's EFSF rescue fund on September 29 after votes in the Austrian and Slovak parliaments were delayed by internal opposition. (Writing by Luke Baker; editing by Janet McBride/Patrick Graham)