US Treasury Secretary Timothy Geithner will discuss with European finance ministers the possibility of leveraging the eurozone's bailout fund to make it more effective in fighting the debt crisis. The disclosure came as the European Central Bank, the US Fed and other major central banks announced joint action to ease dollar funding for stricken European banks to tackle an emerging credit crunch due to the sovereign debt crisis.
--- ECB, Fed, BoJ, other central banks to add liquidity
Geithner will hold talks with EU ministers in Poland on Friday and will propose that the EFSF, the 440 billion euro fund set up in May 2010, be used in a similar way to an emergency fund created by the US Treasury and Federal Reserve in 2008 to handle the subprime crisis, sources said.
"Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece," one EU official told Reuters ahead of the meeting in Wroclaw, Poland. The US emergency fund served to support US banks in the 2007/8 crisis. Responding to signs of similar stress rising in Europe now, the big five central banks agreed on Thursday to reintroduce three-month dollar liquidity operations in the fourth quarter.
The news sharply boosted European bank shares and the euro. Shares in French bank BNP Paribas jumped as much as 13 percent. International Monetary Fund chief Christine Lagarde said the joint move was "exactly what is needed" since the world has entered a dangerous phase of the crisis, and repeated her call for European countries to recapitalise their banks.
Bank of France governor Christian Noyer said all European banks, not just French ones, would have to adjust their business models and shrink their balance sheets because US money market funds were "withdrawing from Europe". Geithner is expected to expound the model of the Term Asset-Backed Securities Loan Facility (TALF) that US financial authorities used to jumpstart the asset-backed securities market, which was frozen at the time and stalling recovery.
Under TALF, the New York Fed, where Geithner was previously president, lent up to $200 billion, taking asset-backed securities as collateral with a haircut, and the US Treasury in turn offered $20 billion credit protection for the Fed. While it remains unclear how the EFSF could be leveraged, one analyst said its funds could be used to guarantee a portion of potential losses on eurozone sovereign debt, giving it more clout than if it just bought the bonds in the secondary market.
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