World presses Europe on debt crisis

Sep 24, 2011, 10:07 a.m.
European Central Bank (ECB) Governor Jean-Claude Trichet (centre L) and U.S. Treasury Secretary Timothy Geithner (centre R) smile as they gather for a group photo with other International Monetary Fund (IMF) governors, during the World Bank/IMF Annual Meetings in Washington September 24, 2011. REUTERS/Jonathan Ernst

By David Lawder and Marc Jones

WASHINGTON (Reuters) - The United States, China and other countries piled pressure on Europe on Saturday to comes to grips with its debt crisis before it risks causing bank runs and pushing the global economy into ruinous recession.

Treasury chief Timothy Geithner, in his most explicit warnings to date, said it was time for the European Central Bank to take a more central role in fighting 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," Geithner told the International Monetary Fund.

Financial markets have been wracked by fears the Greek debt crisis could overwhelm other euro zone countries and banks.

Investors took some comfort on Friday from signs of new resolve by European officials to bolster their defenses after nearly two years of what many see as half-hearted action.

Many policymakers now talk openly of possible Greek default and the need for Europe to move much more aggressively to cope with it.

"Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe," Geithner said.

His warning was echoed by China's central bank governor Zhou Xiaochuan, who urged quick action to bring greater financial stability to the European region.

"The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence, and forceful and credible fiscal consolidation measures are needed in relevant economies to alleviate sovereign debt stress," Zhou told the IMF.

The semi-annual gathering of the IMF and World Bank is dominated by worry about the risk that Europe now poses to the rest of the world.

A default by Greece could cause a domino effect in other highly indebted euro zone countries, officials fear, putting at risk Europe's banking system given the size of holdings of debt issued by weak European nations.

Canada's central bank governor, Mark Carney, told Canadian radio that the euro area's bailout fund should be more than doubled to "the neighborhood of a trillion euros."

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 that the Treasury and the Federal Reserve cooperated during the 2007-2009 financial crisis which threatened to engulf the U.S. banking system.

The United States wants Europe to leverage up the EFSF to give it more firepower. 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.

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