WASHINGTON — US Treasury secretary Timothy Geithner said Saturday that the eurozone needed stronger action from authorities, including the European Central Bank (ECB), to tame a potential deterioration in the debt crisis.
“The success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets,” Geithner told the International Monetary Fund’s (IMF) policy steering committee.
Washington has long pressed Europe to bolster its emergency bailout funds and use them to backstop government debt. It has also urged the ECB to use all the weapons in its arsenal to calm financial markets.
Although the eurozone temporarily boosted the size of its emergency funds, it is not yet clear how officials plan to use the larger and more flexible tools. Also, an official with knowledge of the matter said the ECB signaled to the IMF meetings that it is not considering more cheap loans.
In the meantime, markets are increasingly concerned that Spain may not be able to finance its debt obligations and could require an emergency loan. While the IMF has called on Europe to use its emergency funds to recapitalize weak banks, or even take stakes in the financial sector, some economists say the ECB needs to restart its bond-buying program for Spain and extend more cheap loans to banks.
Geithner also said he welcomed a fund drive that has raised more than $430 billion in new resources for the IMF but that any assistance could only be supplementary to European efforts. Many member countries, concerned about the amount of money the IMF already loaned to eurozone countries, are pushing to limit the fund’s exposure to any more euro risk. Geithner said the IMF promised “to incorporate additional safeguards to protect IMF resources” as a condition for the new cash commitments.
The US is one of the few members of the G-20 largest economies that said it will not participate in the latest funding campaign. Instead, Geithner pointed to the dollar swap lines the Federal Reserve opened to help lubricate a eurozone financial system near to seizing up. “The US continues to support the smooth functioning of international financial markets, including through the central bank swap lines with the ECB,” he said.
The lack of cash pledge from Washington has meant the US is no longer the top contributor to the IMF, losing its spot to Japan.
Geithner also called for Europe to move ahead with a promise to give up two of its eight seats on the IMF executive board. That plan was contingent on ratification of a 2010 IMF governance reform deal that would give emerging markets greater say in how the IMF is run. But the US has not ratified it or indicated when it will.
Several key emerging markets, including China and Brazil, have said they are waiting for more ironclad commitments on completing governance reform before detailing their cash pledges.
Geithner also said that while oil prices were dropping as more supply has come onto the market in the face of an Iranian crude embargo, the US would continue to work to ensure adequate supplies to the market.
He said that as the IMF honed its capital flow management principles, the fund should ensure that flexible exchange rates should be prioritized. Emerging markets, prone to volatile cash flows into and out of their economies, have looked to their exchange rates as a way of taming those investment movements. That, according to some economists, risks touching off a cascade of retaliatory currency actions, which could damage the global economy.
Emerging markets, meanwhile, complain that rich nations’ loose monetary policy is giving them few options to manage those capital flows.