Geithner’s Mission: Impossible

09/19/2011 11:17 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Europe snubbed the US Treasury secretary’s advice and earned the market beating it richly deserved, writes senior editor Igor Greenwald.

It’s another stormy Monday in the financial markets, as the world wakes up to the uncomfortable truth it’s known all along but managed to misplace last week.

Here it is: When it comes to dealing with Europe’s funding crisis and the economic slowdown now manifesting all over the world, there is no plan and little political will.

When US Treasury Secretary Timothy Geithner flew to Europe for the second time in as many weekends Friday, to speak to the continent’s finance ministers, there was the hope that they had grown more receptive to his increasingly urgent pleas for decisive action.

The timing seemed right, on the heels of a dramatic intervention by five central banks to re-liquify Europe’s increasingly frozen interbank lending market. Geithner was also following the heavily publicized conference call that the leaders of Germany and France held with their Greek counterparts, which produced vague talk that Greece will be allowed to stay in the Eurozone, provided it shapes up.

So Geithner flew to Poland, where he was careful to frame his advice as the sharing of the American experience from the crisis of 2008, rather than as a prescription for Europe to follow.

The gist of it was that Europe would find decisive action cheaper than continuing to bicker while markets struggle with “catastrophic risk.” In particular, he explained how the Eurozone could strengthen its main crisis defense, the European Financial Stability Facility, by using it as a guarantee against potential losses on sovereign-bond purchases by the European Central Bank.

In 2009, the Treasury leveraged a modest $20 billion guarantee into an offer of up to $200 billion in asset purchases by the Federal Reserve, thawing the frozen market for asset-backed securities at no apparent cost and to obvious benefit.

Because the American experience is a devalued currency around the world these days, Geithner made sure to eat plenty of humble pie before sharing.

“Our politics are terrible, maybe worse than they are in many parts of Europe,” he said, according to Bloomberg. “Given the damage we caused the world in the early stages of the financial crisis and given the challenges we have, we are not in a particularly strong position to provide advice to all of you.”

His audience liked that part, but not the rest. There is no possibility of a European stimulus to bolster growth, Europe responded, and no support for letting the European bailout fund front expanded bond purchases by the European Central Bank.

“I found it peculiar that even though the Americans have significantly worse fundamental data than the Eurozone that they tell us what we should do and when we make a suggestion…that they say No straight away,” said the Austrian finance minister, referencing the European plan to tax financial transactions, which Geithner opposes.

“I’d like to hear how the United States will reduce its deficits,” said her Belgian counterpart.

While the poodles did the barking, the German shepherds of the pack merely turned their backs. The German finance minister and the head of the Bundesbank made clear the ECB will not be wallpapering its offices in Frankfurt with Italian and Spanish bonds.

Which is too bad, because the EFSF is not up to the task of stopping the rot. Roughly a third of its 440 billion euros ($614 billion) in firepower is already committed to Ireland, Portugal, and possibly Greece, and the rest is not enough to stabilize Italy’s 1.9 trillion-euro debt mountain, notes Reuters.

The Greek government and its European tormentors are haggling today over a 8 billion-euro loan installment meant to stave off default on the 330 billion-euro Greek debt for a few months longer.

More than a quarter of that dead money is still listed as unimpaired assets on the books of European banks. And their exposure to Greece is just one-sixth of their aggregate stake in the debt of Italy and Spain, which would be next in line.

So Europe is now using leverage in reverse by insisting on drastic fiscal austerity that’s undermining growth, and thereby tax collections in the most troubled countries.

No wonder investors are voting no confidence. The world’s largest economic bloc is repeating the errors that stretched the Depression for a decade in the 1930s.

The Federal Reserve looms ever larger as the only global institution willing and able to respond to the emergency, but even the Fed is powerless to counteract Europe’s self-destructive tendencies.

The only real good news is Europe’s economic predicament is about to get a lot worse. And Germany is starting to reckon with its policies’ costs. They’re going to make the printing of euros seem like a bargain, eventually.

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