Geithner: European crisis threatens global economy

8:12 PM crisis, economy, European, Geithner, Global, threatens No Comments

HONOLULU — Treasury Secretary Timothy Geithner has demanded rapid action by Europe to restore financial stability, warning that the region's economic crisis is "the central challenge to global growth."

"We are all directly affected by the crisis in Europe," Geithner said after a meeting of finance ministers of the 21-member Asia-Pacific Economic Cooperation forum late on Thursday. "It is crucial that Europe move quickly to put in place a strong plan to restore financial stability. They're moving ahead, but we just need them to move ahead more quickly and with more force behind it."

Asia-Pacific finance chiefs agreed to do whatever it takes to prevent the malaise from Europe's debt crisis spreading as a possible European recession threatens the global economy.

Wall Street rallies amid progress in Europe

President Barack Obama spoke with German Chancellor Angela Merkel and French President Nicolas Sarkozy late on Thursday and also called Italian President Giorgio Napolitano.

Turmoil
Italy's upper parliament voted on Friday to pass a package of spending cuts, after being pushed to the brink by bond markets. In Athens, a new interim government was sworn in as Greece attempted to calm the political turmoil that has threatened to bankrupt it and force it out of the euro zone.

European shares edged higher on Friday on hopes that Italy would make political progress that will enable it to quickly cut a debt mountain, easing investors' worst fears about the euro zone debt crisis.

The European Union warned on Thursday that the 17 countries using the euro common currency could slip back into recession next year as the debt crisis that has already engulfed Ireland, Portugal and Greece has shown alarming signs of spinning out of control.

The spillover from the European crisis is adding to the pressure in the Asia-Pacific — now the strongest driver of world growth — for more effective trade regimes to help spur job creation and for reforms to ensure financial resiliency.

Geithner said the Asia-Pacific's economies were "in a better position than most to take steps to strengthen growth in the face of these pressures."

A European recession would be felt sharply in the U.S., where growth is already anemic, and in Asia, which relies on Europe as a big market for its cars, clothing, consumer electronics and other exports.

In Rome, months of dithering and delay ended when the Italian upper house voted to pass an austerity package Friday. The law should in the lower house on Saturday, triggering the resignation of prime minister Silvio Berlusconi, who pledged to quit once has promised to resign after the financial stability law was endorsed by both houses of parliament.

Goodbye 'bunga bunga', hello prison for Berlusconi?

Mario Monti, a former European Commissioner who has emerged as favorite to replace Silvio Berlusconi as prime minister.

If the second vote passes smoothly as expected, Napolitano may accept Berlusconi's resignation as early as Saturday night and formally mandate Monti to try to form a new government soon afterwards.

If Rome burns, US will feel the heat

At first, Berlusconi had insisted that early elections were the only option. But he has since softened his stand and is said by sources to be open to a new government.

Greece's new interim Cabinet was sworn in Friday, with former European Central Bank Vice President Lucas Papademos at its helm as prime minister and the key position of finance minister unchanged.

The new government of Papademos, who also spent time as Greece's central bank governor, must now implement the terms of Greece's latest debt deal — a €130 billion ($177 billion) agreement reached by the European Union on Oct. 27. It includes provisions for private bondholders to forgive 50 percent — or some €100 billion — of their Greek debt holdings.

Leave Germany? Live in Germany? It's all Greek to them

With European leaders struggling to agree on how to tackle the deepening crisis, pressure has mounted on the European Central Bank to act more forcefully.

The president of the European Commission warned that the collapse of the eurozone would cause a crash that would instantly wipe out half of the value of Europe’s economy, plunging the continent into a depression as deep as the 1930s slump, according to a report in Britain's Daily Telegraph.

Jose Manuel Barroso said that if the euro area broke apart, the estimated initial cost would be up to 50 per cent of European gross domestic product. "It would jeopardize the future prosperity of the next generation. That is the threat that hangs over us," he said.

The Associated Press, Reuters and msnbc.com staff contributed to this report

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Europe's deepening crisis threatens US economy

3:36 AM crisis, deepening, economy, Europes, threatens No Comments

By John W. Schoen, Senior Producer

With the Greek government on the verge of collapse, Italy facing doubts about its massive debt, the leaders of the industrialized world met in France to try to stop the financial crisis playing out there from spreading around the globe.

Their options are extremely limited. If the crisis isn't contained, the shocks will be felt more painfully in the U.S.

"The European debt crisis is the single biggest threat to the U.S. recovery and the global recovery," said IHS Global Insight chief economist Nariman Behravesh. "The situation in Europe could spin out of control, as we've certainly seen in the last couple of days. And that could take the U.S. down with it."

Nearly two years after the it began,the crisis is already forcing Europe's economy back into recession, according to European Central Bank President Mario Draghi.

“What we are observing now is slow growth, heading towards a mild recession by year end,” he told reporters in Frankfurt Thursday, on the first day of his new job.

The fate of the European and U.S. economies are linked through multiple ties. The trade relationship is "the largest and most complex in the world," amounting to about $3.8 billion day and generating more than 7 million jobs, according to the Office of the U.S. Trade Representative. Slowing consumer and business spending in Europe means slowing demand for U.S. products and services.

The impact of a deeper European recession would be quickly felt on large U.S. companies that have been reporting strong profits overseas despite a sluggish recovery at home. That could force renewed belt-tightening, prompt layoffs and send the unemployment rate higher. 

Hey middle class, tell us about yourselves

To blunt the impact of that downturn, the ECB cut interest rates Thursday - by a quarter point to 1.25 percent - as the crisis widened. Greek officials Thursday scrambled to head off a proposed referendum that could force a withdrawal from the Euro and threaten the viability of the common currency. Deep budget cuts and a mass layoff of government workers have sent the Greek economy sharply in reverse. Though France and Germany are demanding further cuts before extending aid to Athens, Greek leaders counter that further cuts are politically untenable.  

Other heavily indebted European countries are drifting closer to that economic abyss. On Wednesday, Italy missed a critical deadline to come up with a plan to cut its budget deficit and revive growth. Spain, Portugal and Ireland are wrestling with proposals for similar measures to ease those countries' heavy debt burdens. 

Toon-Off: The Greek debt crisis 

As Europe's leaders have proposed, and shelved, multiple solutions in recent months, some observers believe that European leaders have not yet come to terms with the scope of the debt crisis. The latest includes a proposal that holders of Greek debt "voluntarily" agree to see the value of those bonds cut in half. But some observers say the measures proposed so far don't go nearly far enough.

"The Europeans have to come to grips with reality," said former Federal Reserve governor and Columbia University economist Frederic Mishkin.

Mishkin believes that means European leaders need to prepare for a much bigger writedown of Greek debt, along with the larger losses that would inflict on European banks holding those bonds. But it's not clear that European bank regulators have taken the steps needed to make sure the financial system there can withstand those losses.

"This has always been the issue," said Mishkin. "The good news is that the denial phase is starting to go away, and that's critical to finding a successful solution here. Although it's going to be damn difficult to do so."

The threats to Europe's financial system have already rocked U.S. financial markets and sapped American business and consumer confidence. But a wider meltdown could spread rapidly across the Atlantic.  

One "transmission mechanism" would be the impact on the U.S. dollar, which remains a safe haven for global investors in times of crisis. Demand for dollar-based assets drives up the value of the currency, imposing a penalty on U.S. exporters.

While U.S. banks and financial institutions are believed to be relatively well insulated from direct default of Greek and other European debt, less is known about the holders of default insurance on those bonds, so-called credit default swaps.

The proposed "voluntary" Greek bond writedown is an effort to avoid an actual default, an event that would trigger billions of dollars worth of swap payments. The fear is that a cascade of losses from issuers of default insurance could spread quickly through the global financial system, much as the collapse of Lehman Brothers sparked the financial meltdown of 2008.

European central bankers have resisted the kind of massive bond buying programs that the U.S. Federal Reserve undertook to calm the financial waters after the Panic of 2008. Thursday's rate cut signaled that Draghi could bring a more aggressive response to the crisis. But some observers see the move as too little, too late.

"Draghi made clear that the Bank will not buy enough bonds to provide the 'firewall' that markets hope might stem the region’s crisis," said  Jennifer McKeown, an economist for Capital Economics. "For now then, the euro zone’s fate will remain in the hands of the region’s governments, who appear increasingly unable or unwilling to respond."

As the crisis unfolded Thursday, leaders of the Group of 20 largest economies were arriving in Cannes, France for a regularly scheduled meeting. The agenda will include the search for solutions to the nearly two-year-old crisis.

But President Barack Obama and the U.S. delegation will have little new to offer. As Fed chairman Ben Bernanke told reporters Wednesday, Europe's problems can only be solved by Europe's leaders.

"It is a bit frustrating. ... ultimately it's their responsibility to find solutions to this very difficult problem," he said. "Of course, I and Treasury Secretary (Tim Geithner) and other economic policymakers in the United States do confer and meet with European policymakers on a regular basis and we give our advice, for what it's worth.  Sometimes they take it.  Sometimes they don't.  But obviously, they're the ones who have to make those decisions."

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Currency spat: China threatens trade war with US

6:35 AM China, currency, threatens, trade No Comments

BEIJING — China warned Washington it is adamantly opposed to a proposed U.S. bill aimed at forcing Beijing to let its currency rise, saying its passage could lead to a trade war between the world's top two economies.

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In a coordinated response, the Chinese central bank and the ministries of commerce and foreign affairs accused Washington of "politicizing" global currency issues.

The bill to be debated in the United States this week violates World Trade Organization rules and forcing the yuan to appreciate would weaken joint efforts to revive the global economy, the foreign ministry said.

"By using the excuse of a so-called 'currency imbalance', this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-U.S. trade and economic relations," foreign ministry spokesman Ma Zhaoxu said in a statement posted on China's official government website on Tuesday. "China expresses its adamant opposition to this."

U.S. senators voted on Monday to open a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies.

U.S. lawmakers, eyeing 2012 elections, said the undervaluing of China's currency had cost American jobs and that a fairer exchange rate would help cut an annual trade gap of $250 billion.

A top U.S. official said Tuesday the Obama administration has begun discussions with the Senate about whether a bill aimed at forcing China to let its currency rise is "the right approach."

Acting U.S. Commerce Secretary Rebecca Blank told CNBC that the best solution to what American officials view as an undervalued Chinese currency remains "an open question." 

"The administration is talking with people in the Senate about whether this bill is the right approach or whether there are other approaches to take," she said. "Those conversations are under way."

Supporters of the bill say that the value of the yuan is still as much as 40 percent below what it should be, keeping the prices of Chinese goods artificially low and U.S. products excessively high. They say that's a major factor in a trade deficit with China that hit $273 billion last year.

Gradual reform
Ma urged U.S. legislators to "proceed from the broader picture of Sino-U.S. trade and economic cooperation" and "forsake protectionism."

He repeated Beijing's position that it will continue to gradually reform its currency policy, "strengthening the flexibility of the renminbi exchange rate."

Monday's vote bolsters prospects for the bill to clear the Senate later this week, but prospects for action in the House of Representatives are murky.

If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach.

"My colleagues, both Democrats and Republicans, agree that China's deliberate actions to devalue its currency give its goods an unfair competitive advantage in the marketplace," said Senate Majority Leader Harry Reid.

The legislation "will even the playing field and help American goods compete in a global market — and keep American jobs here at home," he said.

China has routinely denied claims that its policies are responsible for trade imbalances and a high rate of unemployment in the United States, saying that structural problems were to blame.

"It is widely understand that the renminbi exchange rate is not the cause of China-U.S. trade imbalances," Ma said.

China's central bank said in a statement that the bill failed to address the underlying issues in the U.S. economy.

"The yuan bill passed by the U.S. senate will not solve its problems, such as insufficient savings, high trade deficit and high unemployment rate, but it may seriously affect the whole progress of China's reform of its yuan exchange rate regime and may also lead to a trade war which we would not like to see."

'Unfair'
China's currency has appreciated 7 percent since June 2010, when the central bank decided to adopt a more flexible exchange rate, said foreign minister spokesman Ma, adding that Beijing would continue "proactive" and "gradual" reform.

The central bank added that Chinese inflation had already pushed the real yuan exchange rate further "toward the equilibrium."

Ministry of Commerce spokesman Shen Danyang said the United States was trying to pass on the blame for its own failings.

"Trying to turn domestic disputes onto another country is both unfair and in violation of standard international rules, and China expresses its concern," he said in a statement issued on the ministry's website.

Shen said any move by the United States to force the yuan to appreciate would undermine joint efforts to revive global economic growth, which took another blow on Monday with data showing that global manufacturing shrank in September for the first time in over two years.

"It will weaken China-U.S. efforts to join hands and together promote global economic recovery," he said. "The global economic is in a complex, sensitive and changeable period, and so even more needs a stable international monetary environment."

U.S. critics of China's currency policy have gained some traction as a weak economy keeps U.S. unemployment stuck above 9 percent and as 2012 presidential elections draw near.

Sen. Chuck Schumer, D-N.Y., who has been sponsoring currency legislation for the past six years, said China's "predatory currency practices" were "undermining the economic health of American manufacturers and their ability to compete at home and around the globe."

It's time, said Sen. Bob Casey, D-Pa., to "let the officials in China know that there are consequences to cheating."

Passage of the bill by the Democratic-controlled Senate would send it to the House, which is run by traditionally free-trade-friendly Republicans.

House expected to pass bill
A China currency bill passed the House last year with 99 Republican votes, but lapsed because the Senate took no action. This year, the bill already has more than 200 House co-sponsors and this week supporters expect to reach 218, the number needed to pass it.

However, House Republican leaders have not shown a great appetite to pursue currency legislation, and it is unclear if the bill would ever face a vote in that chamber.

As with similar legislation in the past, the Obama administration has not taken a public stance on the bill, although White House spokesman Jay Carney said on Monday that the president shares "the goal it represents."

U.S. critics of the bill also warned of the risk of a trade war with China — one of the fastest-growing markets for U.S. goods — just when a weak global economy can least afford it.

The Emergency Committee for American Trade called the bill "a highly damaging unilateral approach that will undermine broader efforts to address China's currency undervaluation."

It also said the bill was unlikely to pass muster at the World Trade Organization and would open the door to Chinese retaliation "to the detriment of U.S. exports and jobs."

The Senate decision was a sign that China was being made a scapegoat by struggling western economies, said Wang Jun, a researcher at the China Center for International Economic Exchanges.

"Maybe the United States will not be the only and last country to do so. With the worsening of the European sovereign debt crisis, we must also be on high alert that euro zone countries could also press China on the exchange rate issue. We need to launch some pre-emptive measures to hit back against any more attacks," Wang said.

Reuters and The Associated Pres contributed to this report.

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