Berlin: US treasury secretary Timothy Geithner takes his appeal for swift European action to calm markets to Germany on Thursday, the key player that stunned markets last week with its ban on some speculative trades.
During his stopover in London, Geithner told Europeans that markets wanted to see the euro zone activate its $1 trillion emergency plan designed to stabilise the currency plagued by fears that a Greek-style debt crisis could hit more countries.
Even as Italy joined a growing roster of European Union nations announcing austerity plans to support the euro, the currency extended its decline on a report that China was reviewing its euro holdings.
The Financial Times said representatives of the Chinese entity that manages the world’s largest foreign reserves had met with foreign bankers in Beijing recently to discuss Chinese exposure to euro zone debt.
But the currency bounced back from levels close to four-year lows after a Chinese government official told Reuters on Thursday that there would be no change in China’s efforts to diversify its reserves.
The euro, which has lost more than 8% against the dollar so far this month and is heading for its biggest monthly fall since October 2008, climbed back to $1.2276 from a day low of $1.2154.
Washington has grown increasingly concerned that the effects of the Greek fiscal blow-out could spread well beyond Europe, with banks prone to a similar confidence crisis that roiled world markets during the 2007-2009 financial crisis.
Germany, Europe’s biggest economy and its main paymaster, holds the key to any successful EU-wide action.
Its initial reluctance to bail out Athens was blamed for the EU’s slow response once Greece’s debt blow-out began morphing into a crisis of confidence in the euro zone as a whole.
Geithner is due to meet European Central Bank president Jean-Claude Trichet and ECB council member and Bundesbank chief Axel Weber in Frankfurt before heading off to Berlin for talks with his German counterpart Wolfgang Schaeuble.
Weber, a leading advocate of fiscal and monetary conservatism on the ECB’s policy council, has long warned about long-term pitfalls of extraordinary steps taken to fight financial crises and distanced himself from the ECB’s move to buy government bonds to stabilise markets and support the $1 trillion emergency plan.
Schaeuble, in turn, angered his EU partners by going it alone and signing off on a ban on so-called naked short selling of Germany’s top financial stocks, euro zone government debt and credit default insurance contracts on that debt.
Berlin blames speculators for aggravating the debt crisis with aggressive bets against the euro, but the move was seen as largely symbolic because it was isolated and most of the targeted trades took place outside of Germany’s jurisdiction.
Geithner, who will hold a joint news conference with Schaeuble before heading back to Washington, may repeat his call for a globally consistent approach to financial reform, seemingly a swipe at Germany’s single-handed action.
Yet despite criticism, Germany looks determined to push through with the clampdown and a finance ministry document showed earlier this week it was even considering widening the ban.
After talks with his British counterpart, George Osborne, Geithner said of the EU plan to support indebted states: “I see a very strong political commitment -- you see that not just in Germany but across Europe -- to make it work. I think what Europe should do is implement the programme they’ve laid out.”
Berlin signed off on a €110 billion Greek rescue and the $1 trillion emergency scheme only in return for pledges of drastic spending cuts from potential beneficiaries.
Greece, Portugal, Spain and Italy have all agreed to push through with multi-billion euro savings despite fierce opposition from trade unions and sometimes violent street protests.
Italian Prime Minister Silvio Berlusconi sought to support the euro on Wednesday with a vigorous defence of his government’s €25 billion ($30.65 billion) austerity package, approved by his cabinet in an emergency decree.
“The sacrifices required are indispensable to save the euro,” Berlusconi said. “For years, Italy -- like many countries in Europe -- lived above its means. We are all in the same boat.” Amid the gloom, the OECD had a rare positive take on the euro’s battering, saying the currency’s decline would help cushion the impact of debt-shrinking austerity efforts and prevent the euro zone from sliding back into recession.
“The weak euro, in the short- to medium-term, is a welcome development.” Pier Carlo Padoan, chief economist for the Paris-based Organisation for Economic Co-operation and Development told Reuters in an interview.
He also said that massive debts following the global recession were “not just a European problem, but one that Europe was about to tackle faster than others.