World Powers Seek To Contain Europe Debt Crisis

Sep 24, 2011
Originally published on September 26, 2011 10:14 am

World stock markets tumbled this week amid fears about Europe's debt crisis, and the subject dominated the discussions at the fall meetings of the World Bank and International Monetary Fund held this weekend.

Europe's sovereign debt problems, including the growing possibility of a default by Greece, have been festering now for more than a year. Investors in the financial markets are questioning the will and capacity of European governments to solve the problem. In the seminars and salons surrounding the meetings, financial heavyweights sounded the alarm.

"For Europe, these meetings are the equivalent of an intervention for an alcoholic," said Mohamed El-Erian, CEO of the giant bond fund PIMCO. "The friends, the family are all coming around the Europeans and saying, 'Guys and gals, you have a problem, and it's bad, and let me tell you about it.' Now the question is: Does Europe respond to the intervention or not?"

Recently, much of the discussion surrounding the European debt crisis has centered on Greece and whether it will get the second round of emergency funding from the IMF and the European Union. But former U.S. treasury secretary and White House adviser Larry Summers told an audience that was like worrying about a broken ankle when organ failure is imminent.

"If a generous sovereign from Mars came down and paid off every penny of Greece's debt tomorrow, the fundamentals of Europe in crisis would not be altered," Summers said.

That's because the underlying problem is the inability of Europe, so far, to follow through on a plan its government leaders agreed to in July. It would allow Europe to use its financial emergency fund, the EFSF, to provide emergency loans at rock-bottom interest rates to countries in trouble, including larger countries with shaky finances, like Italy and Spain.

The fund could also be used to prop up European banks, which could fail if those larger countries defaulted. But the agreement needs to be ratified by the legislatures of all 17 euro zone nations, and fewer than half have approved it so far.

At the IMF meeting Saturday, U.S. Treasury Secretary Timothy Geithner warned that time is running out, and that the threat of cascading default and bank runs must be taken off the table.

In his recent trip to Europe, Geithner suggested the Europeans boost the size of their 440-billion euro rescue fund and take some lessons from the way the U.S. used the $700-billion TARP fund to prop up big banks during its financial crisis.

Geithner was publicly rebuffed by some officials. Not surprising, said Jacob Kirkegaard, a fellow at the Peterson Institute for International Economics.

"Probably the only thing more unpopular in Europe than bailing out Greece is bailing out banks," Kirkegaard said.

Speaking from his native Denmark, Kirkegaard said he believes, in the end, Europe will do what needs to be done.

"But we're going to see a continuation of this extreme volatility in financial markets for quite a while yet, because this is not something that's going to be solved in the next couple of weeks or the next couple of months, " he said. "We're in for a bumpy ride."

That's even if Greece gets the next installment of its bailout, which Kirkegaard believes it will.

At the end of the IMF meetings, Managing Director Christine Lagarde said its members were ready to take bold action.

"I myself was certainly very strongly encouraged by the purpose, the determination, the sense of absolute urgency that was shared among the membership," Lagarde said.

For the Europeans, Lagarde said, the key is implementation of their July agreement. The German Parliament takes up the agreement this week.

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Transcript

AUDIE CORNISH, Host:

This is WEEKEND EDITION from NPR News. I'm Audie Cornish.

World stock markets tumbled this week amid fears about Europe's debt crisis. And this weekend, the subject dominated discussions at the fall meeting of the World Bank and International Monetary Fund.

As NPR's John Ydstie reports, the United States and other countries intensified their lobbying effort to get European officials to do more to solve the problem.

JOHN YDSTIE: Europe's sovereign debt crisis, including the growing possibility of a default by Greece, has been festering now for more than a year. Investors in the financial markets are questioning the will and capacity of European governments to solve the problem. In the seminars and salons, surrounding the IMF/World Bank meetings this weekend, financial heavyweights sounded the alarm.

(SOUNDBITE OF CONVERSATIONS)

MOHAMED EL: For Europe these meetings are the equivalent of an intervention for an alcoholic.

YDSTIE: That's Mohamed El-Erian, CEO of the giant bond fund PIMCO.

ERIAN: The friends, the family are all coming around the Europeans and saying guys and gals, you have a problem and its bad and let me tell you about it. Now the question becomes does Europe respond to the intervention or not.

YDSTIE: Recently much of the discussion surrounding the European debt crisis has centered on Greece and whether it will get the second round of emergency funding from the IMF and the European Union. But former U.S. Treasury Secretary and White House advisor Larry Summers told an audience that was like worrying about a broken ankle when organ failure is imminent.

LARRY SUMMERS: If a generous sovereign from Mars came down and paid off every penny of Greece's debt, the fundamentals of Europe in crisis would not be altered.

YDSTIE: That's because the underlying problem is the inability of Europe, so far, to follow through on a plan its government leaders agreed to in July. It would allow Europe to use its financial emergency fund to provide emergency loans at rock bottom interest rates to countries in trouble, including larger countries with shaky finances, like Italy and Spain. The fund could also be used to prop up European banks, which could fail if those larger countries defaulted.

But the agreement needs to be ratified by the legislatures of all 17 Eurozone nations, and fewer than half have approved it so far.

At the IMF meeting yesterday, U.S. Treasury Secretary Timothy Geithner warned that time is running out, and that the threat of cascading default and bank runs must be taken off the table. In his recent trip to Europe, Geithner suggested the Europeans boost the size of their 440 billion euro rescue fund and take some lessons from the way the U.S. used the $700 billion TARP fund, to prop up big banks during it's financial crisis.

Geithner was publically rebuffed by some officials. Not surprising, says Jacob Kirkegaard.

JACOB KIRKEGAARD: Probably the only thing more unpopular in Europe than bailing out Greece is bailing out banks.

YDSTIE: Speaking from his native Denmark, Kirkegaard, a fellow at the Peterson Institute for International Economics, says he believes in the end Europe will do what needs to be done.

KIRKEGAARD: But we're going to see a continuation of this extreme volatility in financial markets for quite a while yet. Because this is not something that's going to be solved in the next couple of week or even the next couple of months. So we're in for a bumpy ride.

YDSTIE: At the end of the IMF meetings yesterday, Managing Director Christine Lagarde said it's members were ready to take bold action.

CHRISTINE LAGARDE: I certainly myself was very strongly encouraged by the purpose, the determination, the sense of absolute urgency that was shared amongst the membership.

YDSTIE: For the Europeans, said Lagarde, the key is implementation of their July agreement. The German parliament takes it up this week.

John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.