Europe aims to beef up crisis fund

Sep 24, 2011, 11:40 a.m.
Russia's Minister of Finance Alexei Kudrin (L), U.S. Federal Reserve Chairman Ben Bernanke and European Central Bank (ECB) President Jean-Claude Trichet take their seats for an International Monetary and Financial Committee (IMFC) meeting in Washington September 24, 2011. REUTERS/Jonathan Ernst

Greek finance minister Evangelos Venizelos told reporters that Athens was determined not to default. "Greece is determined to honor all its obligations. No Greek paper will ever go uncovered."

Geithner wants more cooperation among European policymakers -- who set their own tax and fiscal policy -- and their central bank that is mandated to focus on keeping inflation low.

"European governments should work alongside the ECB to demonstrate an unequivocal commitment to ensure sovereigns with sound fiscal policies have affordable financing, and to ensure that European banks have recourse to adequate capital and funding to win the full confidence of their depositors and creditors," Geithner said.

The United States has been pushing for a heightened role for the ECB. Washington has pointed to the way the Treasury and the Federal Reserve cooperated during the 2007-2009 financial crisis which threatened to engulf the U.S. banking system.

One option could be for the ECB to commit large amounts of funding, with the European Financial Stability Facility, Europe's temporary bailout fund, putting forward money to cover potential losses.

In another sign of Europe considering new measures to tackle the crisis, a senior lawmaker from German Chancellor Angela Merkel's conservatives said the euro zone's permanent rescue mechanism should be introduced sooner than mid-2013 to beef up private creditors' response to the Greek debt crisis.

But in a reminder of how sensitive some European officials are to the ECB taking a more active role in the crisis, a board member of Germany's central bank, the Bundesbank, suggested the time was coming for the ECB to stop buying government bonds.

"I think the time is coming for this to stop," said Joachim Nagel, adding that the ECB's bond buying was only supposed to be a temporary measure until the euro zone's bailout fund is beefed up with powers to buy bonds and lend to governments.

Another top ECB official sought to quash growing expectations that Greece will eventually default.

ECB Governing Council member Athanasios Orphanides said the idea of a Greek default was "surreal" but warned that it could occur as the result of a "political accident."

Greece is in tense talks with the IMF and European authorities to secure a new 8 billion-euro installment of its rescue package.

In return, Athens has pledged deep austerity measures but negotiators are frustrated at what they say is Greece's slow reform pace. October's loan payment, however, is still widely expected to be made. The next installment is due in December.

Germany, as the strongest economy in Europe, plays a central role in any effort to curb a debt crisis but public opinion there has turned against further big bailouts for fellow euro zone countries.

Finance Minister Wolfgang Schaeuble said on Saturday he will meet Venizelos, while in Washington for the IMF meetings.

"We are permanently in contact and talk a lot," Schaeuble said, a day after Merkel said a Greek default was not an option for her.

"The damage would be impossible to predict," Merkel warned members of her political party in Germany.

Greece's Venizelos was quoted by two newspapers on Friday as saying an orderly default with a 50 percent haircut for bondholders was one way to resolve the heavily indebted euro zone nation's cash crunch.

(Additional reporting by IMF reporting team in Washington, Sakari Suoninen in Frankfurt, Writing by Glenn Somerville and William Schomberg; Editing by Andrea Ricci)

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