Finance chiefs reassure CEOs over European crisis

By Pan Pylas

Associated Press

Published: Friday, Jan. 27 2012 8:21 a.m. MST

US Secretary of Treasure Timothy F. Geithner talks about US Economy during a plenary session at the 42nd annual meeting of the WEF in Davos, Switzerland, Friday, Jan. 27, 2012. The meeting lasts until Jan. 29.

Anja Niedringhaus, Associated Press

DAVOS, Switzerland — Leading finance chiefs sought to reassure anxious global business leaders on Friday that Europe is on track to solve its crippling debt crisis before it drags the world's economies down. Europe's top banker said investors, burned after trusting the region's governments too much, now trust them too little.

The finance chiefs said the picture in Europe has changed over the past two months as the European Central Bank has loaned billions of euros to fragile banks, indebted countries have pushed through convincing reforms and EU leaders have come near to building a closer fiscal union that would make their common currency stronger.

Several also signaled Friday that Greece is close to clinching a crucial debt-reduction deal with private bondholders — a key element in Europe's efforts to stem a two-year debt crisis that is causing ripples around the globe. The crisis is a central topic at the World Economic Forum, a gathering of government and business leaders at the Swiss ski resort of Davos.

"They're making progress on reforms, they're changing the institutions of Europe to put better discipline on fiscal policy," said U.S. Treasury Secretary Timothy Geithner. "You have three new governments doing some very tough things. You have an ECB doing what central banks have to do. You see them move to try to strengthen the financial sector."

Mario Draghi, head of the European Central Bank, said a combination of actions — including super-cheap, long-term loans to shaky banks on the continent and a couple of interest rate cuts — have turned the crisis around.

"We have avoided a major credit crunch, a major lending crisis," he said.

Draghi said borrowing rates would remain high "for quite a while" because bond markets are overestimating the risk involved in holding European government debt after years of underestimating it. But he called market pressure "the most potent engine for reform in different governments."

Geithner said the fate of the U.S. economy — and by extension of the rest of the world — hinges on Europe's debt crisis, along with potential tensions with Iran. He said the main piece of unfinished business for Europe is building a bigger fund to help troubled economies survive.

But while French Finance Minister Francois Baroin said that fund needs to be increased to calm markets, his German counterpart, Wolfgang Schaeuble, indicated that his government is not prepared to do so. Germany, as Europe's biggest economy, would face the biggest bill.

"We must not give the wrong incentives," Schaeuble said. "You can make any figure. It will not work if the real problems will not be solved."

Both, together with Spanish Economy Minister Luis de Guindos Jurado and European Monetary Affairs Commissioner Olli Rehn, agreed that the idea of issuing "eurobonds" backed jointly by all eurozone governments is a non-starter for now. They didn't rule out the possibility that such bonds could be introduced once confidence in Europe's public finances is restored, with Guindos calling that a "final target."

Schaeuble said eurobonds would provide bad incentives by allowing debt-ridden countries to "spend money you don't have on the bill of others."

Many economists have said eurobonds are needed to solve the crisis as they could reduce the borrowing costs of heavily indebted countries by pooling them with bonds of stronger economies like Germany's.

European leaders have been especially concerned about Greece, whose borrowing costs are so high that it needs a second European bailout just to pay its interest, but the finance chiefs signaled Friday that a deal is at hand.

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