Geithner, Schaeuble Hail Euro Plan as Greece Gets No Word

Geithner, Schaeuble Discuss Need for Cooperation on Growth
U.S. Treasury Secretary Timothy Geithner, right, talks to German Finance Minister Wolfgang Schaeuble on the German North Sea island of Sylt, northern Germany, on Monday. Photographer: Patrik Stollarz/AFP/Getty Images

U.S. Treasury Secretary Timothy F. 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 today, 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 today by meeting with Draghi in Frankfurt. An ECB spokeswoman declined to comment when asked whether the ECB would release a statement after the Draghi meeting.

‘Fundamentally Solvent’

Greece’s absence from the Treasury’s “very carefully worded” statement reflects the view that the other countries mentioned are “fundamentally solvent,” while Greece is “a fundamentally insolvent economy,” Domenico Lombardi, a senior fellow at the Brookings Institution in Washington, said in an interview.

“The main purpose of U.S. strategy at this moment is pushing the Europeans -- that is, Germany -- toward supporting a bolder and more aggressive stance by the ECB, which is really believed to be key at this juncture to avoid a meltdown of the euro,” Lombardi said. Geithner is trying to reach “ a consensus among key euro area countries” to support a bolder ECB approach.

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

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 euro zone 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.”

Temporary Fund

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 yesterday.

Prime Minister Antonis Samaras and his coalition partners, Evangelos Venizelos of Pasok and Fotis Kouvelis of Democratic Left, are meeting again today to try and determine the savings required to receive the funds pledged under Greece’s two rescue packages totaling 240 billion euros.

Euro Drops

The euro fell 0.6 percent to $1.2258 at 2:40 p.m. in New York. 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 today.

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 today.

Bundesbank Hurdle

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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