THE US stepped up pressure on the European authorities over the euro debt emergency as treasury secretary Timothy Geithner called for action to advance plans for a €750 billion EU/IMF safety net for distressed members of the single currency.
Although equity markets rallied yesterday from levels not seen since autumn, the euro lost ground for a third day as Mr Geithner arrived in Europe for talks in Britain and Germany.
His visit came against the backdrop of a positive forecast for the performance of the global economy from the Organisation for Economic Cooperation and Development (OECD) and a warning from EU economics commissioner Olli Rehn that Europe faces stagnation and irrelevance if its economy is not revived.
The atmosphere on markets remained volatile as Italian trade unions threatened a general strike against a €24 billion austerity drive by Prime Minister Silvio Berlusconi and the Greece sought to water down its EU/IMF bailout.
Only one week after Athens received a €20 billion loan from euro zone countries and the IMF, officials said the Greek government were trying to renegotiate a draconian pension reforms.
Athens wants the EU and IMF to agree full pensions should be payable after 37 years of contributions instead of 40, as set out in the rescue agreement.
Mr Geithner met new British chancellor George Osborne in London and he was meeting in Frankfurt last night with European Central Bank chief Jean-Claude Trichet.
His meeting today with German finance minister Wolfgang Schäuble comes amid widespread anger at Berlin’s unilateral ban on “naked short-selling” of financial stocks. In advance of that meeting, Mr Geithner pointedly called on the European authorities to work for a globally consistent approach to financial reform.
The EU/IMF loan guarantee plan for weakened euro countries was a “good programme” and embraced “all the right elements”, he said in London. “What markets want to see is action.”
The pan-European FTSEurofirst 300 index of top shares rose 2.4 per cent to close at 972.17 points, after dropping the same amount on Tuesday to finish at its lowest close since September.
Against the US dollar, the euro was down 0.9 per cent in early New York trade. The currency traded around $1.2256 after a session low of $1.2226, having hit $1.2177 on Tuesday.
The Paris-based OECD said the recovery of the global economy was swifter than expected. It warned, however, that the turnaround remained at risk from huge debts in developed countries.
In forecasts more optimistic than the European Commission, it said the euro zone economy will expand by 1.2 per cent this year and 1.8 per cent in 2011.
The OECD said Greek-based assets held by French, German and US banks amounted to “relatively small shares” of their total external exposure. “A hypothetical loss on these assets would consume an amount of banking sector capital which would remain manageable,” it said. “Concern has also been expressed about the risk of contagion. If, hypothetically, losses were to arise also on assets based in Portugal and Spain . . . the impact on the capital of French and German banks could be more challenging.”
It said the risk of commercial banking sector losses has fallen since agreement on the EU/IMF rescue net. As Mr Berlusconi said his new austerity plan was needed to save the euro, Mr Rehn said the cuts in Italy were “very significant” and in the right direction.
