Europe finally listening to Geithner

Until a few days ago repeated predictions of doom from Tim Geithner and Barack Obama seemed to fall on deaf European ears. Now that leaders are listening, time may be too short
US treasury secretary Timothy Geithner at the G20 finance ministers' meeting at the weekend. He warned against chaining down banks and urged action to support the financial sector Photograph: Eric Piermont/AFP/Getty Images

There are six days to save the world. That's according to the US treasury secretary, Tim Geithner, who told the G20 finance ministers' summit in Paris on Saturday that only a massive firewall would protect the eurozone against contagion from a Greek default.

It's a message that the US president, Barack Obama, and his battle-hardened finance boss have sent across the Atlantic several times in the last six weeks. Geithner has popped up in European capitals three times in that period to deliver the message in person.

Until a few days ago it was something the French and Germans closed their ears to. No amount of calls for "shock and awe" shifted their position. There was simply a stubborn refusal to define the Greek situation as anything more than a local difficulty, and definitely not a crisis.

Six days is not a long time to design a mix of insurance policies, guarantees and bank capital top-ups worth upwards of €1.5tn (£1.3tn) that are credible to the financial markets and avoid making politicians look like they have spent every last euro cent of taxpayer funds. There is a huge industry in trying to second-guess the direction of travel in Paris and Berlin after Nicolas Sarkozy and Angela Merkel said they would reveal a killer plan next Sunday.

What kind of insurance and guarantees are in the pipeline? How much will vulnerable banks (and other private investors) be told to write off in bad loans to Greece and how many euros must the banks find to fill the void left by these bad investments?

Hedge funds, pension funds and the super wealthy are all placing bets on how negotiations will work out. Will the euro stand or fall?

Betting against Sarkozy and Merkel cobbling together a deal is bold and risky. Most likely they will unveil a package of measures that lacks the clean lines and firepower of the "big bazooka" demanded by many economists, but will be just enough to kill the Greece problem and defend Italy, Spain, Portugal and Ireland. French and German banks, which lent billions of euros to Greece, Ireland and Portugal, will also be sheltered by the deal.

Geithner is convinced the French and Germans now recognise the problem, but reading his body language and the way he spoke about the prospects for meeting the six-day deadline, he was more circumspect. He said there was an enormous amount of detail to work through before plans would look convincing and hinted that time was running desperately short.

Geithner is also concerned that Merkel in particular is more concerned about rushing through reforms of the system before tackling the problems at the heart of the crisis. Some 38 pieces of EU legislation have either been put on the statute or are in the pipeline.

There have always been several problems with this rush to legislate, at least on this scale. First it distracts from the immediate problem of tackling the EU's debts. It whacks banks and other financial institutions when they are already on their knees, and the legislation heaps costs on the finance industry that, in turn, hamper growth. Without banks to lend, especially to smaller companies, we have no investment.

It is this last point that most exercised Geithner. He openly warned the EU against rushing to ball-and-chain the banks and make a crisis certain.

There is a flaw to the Geithner plan of massive guarantees and insurances for Wall Street that keeps them afloat and lending, and it can be seen in a park only a stone's throw from the New York stock exchange. The Occupy Wall Street campaigners are disgusted that propping up the banks means allowing the old rapacious bonus culture to go unreformed.

Geithner argues there are many on Wall Street who are suffering because they are paid in shares and not cash. Some US bank shares are down by a half or more since the summer. But that ignores the wider picture.

If the euro is saved, with billions more in taxpayer loans and guarantees, those bank shares will rocket and the bankers will be back in clover, more than they are already.

The US treasury secretary worries that Europe needs international investors on board, only to reckon it can win a game of chicken. When countries have borrowed so much from US pension funds, Middle Eastern petrodollar sovereign funds and the Chinese, they need private investors.

In 2008 the US treasury dared the markets to bet against the government and lost. It wants the EU to heed that experience.

Left to their own devices, traders panic, fearful on behalf of their investor clients that further losses lie just round the corner. The panic, far from being the invisible hand of the markets lauded by many right-wing economists, is a bludgeoning stick causing pain and unemployment wherever it strikes.

In these circumstances, reforms to tackle banks, brokers and investors should be delayed while protester-friendly taxes on wealth go ahead.

There is another crisis looming, possibly in only a few years. But it will come from another direction –the savings in China, Germany, Japan and the US looking to spark another asset boom. Tackling that situation poses even bigger problems for politicians.

But first we need some sustainable growth, and to avert a euro debt crisis.

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