European finance ministers ruled out efforts to prop up the faltering economy and gave no indication of providing aid for lenders

September 16, 2011

Europe Rules Out Stimulus, Skips Bank Aid

http://articlesofinterest-kelley.blogspot.com/2011/09/european-finance-ministers-ruled-out.html

European finance ministers ruled out efforts to prop up the faltering economy and gave no indication of providing aid for lenders to go along with yesterday’s liquidity lifeline from the European Central Bank.

Clashing with U.S. Treasury Secretary Timothy Geithner, finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.

“We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing today’s trans-Atlantic finance meeting in Wroclaw, Poland. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.”

Continues

Europe’s economy will barely grow in the second half of 2011, a casualty of the debt buildup that 256 billion euros ($353 billion) in aid for Greece, Ireland and Portugal has failed to extinguish.

Attending a euro crisis meeting for the first time, Geithner said Europe projects an image of “ongoing conflict” between national governments and the central bank, hampering efforts to put the economy on a sounder footing.

“Your financial challenges in Europe are eminently in your capacity to manage financially, you just have to choose to do it,” Geithner said at a separate conference in Wroclaw.

Trichet’s Appeal

Echoes of that appeal came from ECB President Jean-Claude Trichet, six weeks from the
end of an eight-year term as the overseer of euro interest rates.

“Our permanent message is of course to be ahead of the curve,” Trichet told reporters. “All that I heard goes in this direction. But the problems are not words, the problems are deeds.”

The ECB was in the forefront again yesterday, joining other major central banks in offering dollar loans to ease a liquidity crunch that had confronted European banks with the highest costs for obtaining the U.S. currency in almost three years.

Finance chiefs stuck by the view that commercial banks have enough capital to ride out the turbulence that has driven the bonds of Greece, the epicenter of the crisis, to less than half their nominal value.

The debt overhang is taking its toll on the wider economy, the European Commission said yesterday. It cut its growth forecast to 0.2 percent for the third quarter and 0.1 percent in the fourth, down from projections of 0.4 percent for both periods.

Recovery Stalling

“Recovery is stalling in the second half of the year, but we do not forecast a return to recession,” European Union Economic and Monetary Commissioner Olli Rehn said. “Uncertainty and stress in financial markets is now having negative ramifications in the real economy and is hampering our growth prospects.”

The ministers recommitted to a July 21 decision to reinforce the main rescue fund for distressed governments, pushing the target for endowing it with new powers back by two weeks to mid-October.

Country-by-country approval of the new-look fund inched forward yesterday, with Spain and Luxembourg voting in favor. So far, five governments have ratified the upgrade of the 440 billion-euro fund, known as the European Financial Stability Facility.

German Vote

The key vote is on Sept. 29 in Germany, where Chancellor Angela Merkel is struggling to muffle dissident voices inside her coalition that have raised the prospect that Greece will go bankrupt and, ultimately, leave the currency union.

European officials are close to an agreement on how the strengthened fund will use its new powers, which include bond purchases in the primary and secondary markets, precautionary credit lines and a bank-recapitalization facility.

Trichet pressed governments to act “fully, comprehensively and rapidly,” in part to take the bond-buying role over from the ECB. The central bank has bought 143 billion euros of bonds, starting with Greece, Portugal and Ireland last year and widening the support operation to Italy and Spain in August.

Pre-emptive credit lines may go as high as 10 percent of GDP, or 160 billion euros in the case of Italy. Such sums would potentially exhaust the fund’s 440 billion-euro war chest and force European leaders to put in more.

No Talk of Expansion

Juncker said there was no discussion of putting more money into the fund today -- at least not while Geithner was in the room.

“We are not discussing the increase or the expansion of the EFSF with a non-member of the euro area,” Juncker said.

Greece is now looking to the ministers’ next meeting, on Oct. 3, for a decision on the release of an 8 billion-euro loan installment. The loan would be disbursed by mid-October, enabling the government to pay its bills through the end of the year.

The fate of future Greek loans remains tied up by a demand by Finland, one of Europe’s six AAA rated countries, that it receive collateral, potentially in the form of real estate or shares in nationalized Greek banks.

While a final agreement eluded them, the ministers agreed on the principle that collateral must carry a cost, with the goal of limiting its use to Finland.

“There is unity that collateral, first of all, must be open to all and, second, must cost something,” Austrian Finance Minister Maria Fekter said.

On personnel matters, Juncker set a Sept. 27 deadline for nominations to replace Germany’s Juergen Stark on the ECB’s Executive Board. Stark, an opponent of the bank’s bond-purchase program, said last week he will quit before his term ends in May 2014.

The only candidate so far is German Deputy Finance Minister Joerg Asmussen.

http://www.bloomberg.com/news/2011-09-16/europe-rules-out-stimulus-offers-no-bank-aid-at-geithner-parley.html