U.S. to Europe: build bigger debt firewall
Thursday, 23 February 2012 | 13:52
Treasury Department officials expressed cautious optimism on Wednesday that Europe was gaining ground on its sovereign debt crisis but cautioned that it still must put up a convincing financial firewall against the risk of contagion.
Speaking ahead of a Group of 20 meeting in Mexico, Treasury's under secretary for international affairs, Lael Brainard, said Europe's debt remains the most serious threat to global growth and specified Europe must do more before more aid from the International Monetary Fund is discussed.
Her remarks came just a day after euro zone finance ministers approved a $172.13 billion bailout package for Greece after lengthy negotiations.
Brainard praised "very significant commitments in recent days" made by Greece and its lenders and said that, if met, they will reduce Greek debt loads to levels that officials expect will avert default.
"When you put these things together, they suggest that the path forward for Greece, if it is able to deliver on the commitments, will be a sustainable path," Brainard said. Greece agreed to punishing spending cuts to secure a second bailout, which has led to mass protests but wards off a default that could have come as early as next month.
Brainard cited several signs of progress.
"Europe has made important strides over past days and weeks. New leaders in Italy and Spain are implementing ambitious reforms," she said. "The ECB's actions have helped to ease funding pressures...(and) European banks that were frozen out of the market have been able to borrow again."
Several European countries have expressed a wish for the IMF to take a larger role in fighting the debt crisis and are urging that it get more resources to be able to fight financial crises.
Support from the United States, the biggest contributor to the IMF, for the Greek bailout is critical to prospects for getting more IMF money.
The G20 meeting in Mexico City on Saturday and Sunday is expected to be dominated by discussion of the ongoing efforts to deal with Europe's sovereign debt crisis.
Brainard repeated that the Obama administration will not ask Congress for more funding for the IMF this year.
"We believe that the IMF should continue to play a constructive role in Europe, but IMF resources cannot be a substitute for a strong and credible firewall," she said. "I am sure when the European response becomes clear, the G20 will be able to better assess IMF resources."
Her comments were similar to those of British Finance Minister George Osborne and his Japanese counterpart, Jun Azuni, who wrote in the Financial Times that the euro zone had to do more to find a long-term solution for its crisis before they would boost their contributions to the IMF.
The British and Japanese ministers said that, despite some progress, Europe should do more to handle its own problems and added that, as IMF supporters, they would only play their part "if certain conditions are met."
Brainard noted that European officials were due to meet in early March to consider the adequacy of its emergency fund. It is expected that they will then consider whether to increase their own funding against potential financial crises.
She said Europe's crisis was "the foremost risk" to a global recovery that remains fragile and vulnerable to shocks. But she noted that European banks had ample liquidity and were again able to borrow in markets, which has led to easier financial conditions.
The G20 meeting this weekend, which will be the first under Mexico's leadership, is also expected to be a forum for discussion about the risk from rising oil prices, Brainard said, adding that there would likely be some consideration given to how to avoid supply disruptions.
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