U.S. Treasury Secretary Timothy Geithner, in an apparent criticism of Germany, called for a “carefully designed global approach” to financial reform on Wednesday as he arrived in Europe for talks on a euro zone debt crisis that is shaking world markets.
European shares rallied from nine-month lows but the euro remained under pressure amid continuing signs of banks’ reluctance to lend to euro zone counterparts exposed to southern European sovereign debt.
Geithner’s stress on coordination on new regulation appeared aimed chiefly at Germany, Europe’s biggest economy, which stunned markets and angered European partners by unilaterally banning some speculative financial trades.
He is due to meet German Finance Minister Wolfgang Schaeuble in Berlin on Thursday after talks with new British counterpart George Osborne and Bank of England Governor Mervyn King in London on Wednesday and dinner in Frankfurt with European Central Bank President Jean-Claude Trichet.
“I’m going to meet the new UK government to prepare for the next stage of global financial reform — on the heels of what we expect to be a quick passage of U.S. reforms — to emphasise the importance of a carefully designed global approach, and to discuss developments in Europe,” Geithner told reporters aboard an overnight flight from China.
Business television channel CNBC said he would also urge the Europeans to stress test their banks to identify those that need new capital and restore market confidence in the banking system.
European regulators conducted a confidential assessment of the solvency of national banking systems last September, but their reassuring conclusion failed to dispel doubts because they did not test individual banks or publish detailed findings.
European bank shares slumped on Tuesday in the wake of the Bank of Spain’s takeover of a small regional savings bank, CajaSur, amid concerns that a sovereign debt crisis that began with Greece may turn into a wider banking crisis.
The costs for banks to borrow dollars from each other reached the highest levels in 10 months on Tuesday.
Investors are not confident that measures so far, including Germany’s ban on naked short-selling of some securities, austerity plans by indebted euro zone members or even a 750 billion euro $926 billion (643 billion pounds) rescue fund will be enough to prevent Europe’s woes from derailing the global recovery.
The Paris-based Organisation for Economic Co-operation and Development said the global economy was recovering faster than expected from recession with Asia leading the way but remained at risk from huge debts in developed countries.
It also said banks remained vulnerable, noting the high price of credit default swaps to protect bank bond investments.
Any European stress tests would have to differ from those conducted by U.S. regulators early last year, because Europe lacks a huge bailout fund like the $700 billion Troubled Asset Relief Program to plug any capital deficiencies found.
Geithner and other Treasury officials routinely cite the U.S. stress tests, which helped open the door for private capital to return to the banking sector, as calming intense market turmoil caused by the financial crisis.
GERMAN BANS “COUNTER-PRODUCTIVE”
A senior U.S. Treasury official said Washington was unhappy with Berlin’s “counter-productive” decision to go it alone in banning naked shorting of shares in top financial companies and sovereign euro bonds and related transactions in sovereign credit default swaps.
Geithner has also criticised European Union proposals to regulate hedge funds and private equity, warning that they could discriminate against non-European funds.
Far from yielding to unanimous criticism from Washington, Paris and London, Berlin proposed on Tuesday extending restrictions on such speculative trades to include all shares, a government source said.
Chancellor Angela Merkel reaffirmed on Wednesday that Germany would do everything in its power to support a strong euro and said the competitiveness of all European Union states must be aligned.
“Germany, as the largest economy in the EU, has profited greatly from the euro,” she said during a visit to Saudi Arabia. “Therefore, we will do all we can for a strong euro.
AUSTERITY DRIVE
In the latest move in a German-inspired Europe-wide austerity drive meant to restore market confidence, Italy’s cabinet approved a multibillion-euro package of budget cuts designed to slash the government’s deficit to beneath the EU ceiling of 3.0 percent of GDP by 2012.
A draft of the 24 billion euro ($29.49 billion) plan obtained by Reuters included a four-year freeze on public sector salaries, and a reduction in state personnel by replacing only one in five of those who leave.
Italy joined Greece, Spain, Portugal and Britain in trying to slash deficits but the downside could be slower growth.
“There is indeed a risk that, under market pressure, some countries overdo austerity,” Olivier Blanchard, chief economist of the International Monetary Fund, said in a newspaper interview. “That would be a mistake.”
Worries that the European debt crisis could engulf banks have pushed the global benchmark borrowing rate of three-month LIBOR to a 10-month high.
Money markets are “pricing in for a credit crunch,” said Michael Pond, Treasury strategist at Barclays Capital in New York. “A crisis of confidence is developing once again.”
The U.S. Federal Reserve could cut the rate it charges the European Central Bank for dollar supplies via swaps if the debt crisis worsens, the Wall Street Journal said.
