Geithner to discuss leveraging EU bailout fund
Sep 15, 2011, 10:52 p.m.
By Jan Strupczewski and Sakari Suoninen
WROCLAW, Poland/FRANKFURT (Reuters) - Treasury Secretary Timothy Geithner holds talks with European finance ministers on Friday on the possibility of leveraging the euro zone's bailout fund to help resolve the debt crisis.
Washington set up an emergency fund to support U.S. lenders during the global credit crisis. With signs of stress in Europe now, the European Central Bank and those of Britain, Japan and Switzerland joined forces on Thursday to reintroduce three-month dollar liquidity operations in the fourth quarter.
The coordinated action boosted the euro and global stocks, prompting market speculation that European policymakers may take bold steps to deal with a crisis that is now threatening Italy, the euro zone's third-biggest economy.
After rising 2 percent on Thursday, world stocks rallied in Asia on Friday. The MSCI world stock index rose 0.6 percent in Asia to a one-week high, marking its fourth straight daily gain. The euro held on to Thursday's strong gains.
The central bank move was "exactly what is needed" since the world has entered a dangerous phase of the crisis, said International Monetary Fund chief Christine Lagarde. She repeated her call for European countries to recapitalize their banks.
Geithner holds talks with EU ministers in Poland and will propose that the European Financial Stability Fund, the 440 billion euro fund set up in May 2010, be used in a similar way to an emergency loan fund created by the U.S. Treasury and the Fed in 2008 to thaw frozen credit markets, sources said.
"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," an EU official told Reuters ahead of the meeting in Wroclaw.
The treasury secretary is expected to expound the model of the Term Asset-Backed Securities Loan Facility (TALF) that U.S. financial authorities used to jump-start the asset-backed securities market.
Under TALF, the Treasury offered up to $20 billion in credit protection to the New York Federal Reserve Bank, where Geithner was then president, allowing it lend up to $200 billion. In return, the New York Fed took in asset-backed securities as collateral with a haircut.
TALF was credited with restarting frozen U.S. markets for securities backed by car, student and small business loans and leases. By taking in paper that had no other buyers at the time, the Fed acted as market maker. No losses were reported on the program.
While it remains unclear whether the same mechanism could be used to leverage Europe's bailout funds, one analyst said EFSF money could be used to guarantee a portion of potential losses on euro zone sovereign debt bought by the ECB, providing more purchasing clout than if it just bought the bonds in the secondary market with money on hand.
"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.