U.S. Treasury secretary expected to press for action By William L. Watts, MarketWatch FRANKFURT (MarketWatch) — Euro-zone finance ministers are meeting in Poland Friday in an effort to heal divisions that have undermined efforts to get a grip on the region’s sovereign debt crisis and raised international fears of a widespread financial crisis. Underscoring the concern, U.S. Treasury Secretary Timothy Geithner is attending the meeting and is expected to urge policy makers to explore ways to leverage the euro-zone’s rescue mechanism, the 440 billion euro ($609.8 billion) European Financial Stability Facility, in order to provide more firepower to fight the crisis, analysts said. “Geithner’s presence signifies the anxiety and concerns across the pond over Europe and will put further pressure on policy makers to reach some decisive actions,” wrote strategists at Lloyds Bank in London. Reuters on Thursday reported that Geithner would urge officials to take a close look at the Term Asset-Backed Securities Loan Facility, or TALF, used by the U.S. government to rekindle the asset-backed securities market and encourage lending. Under the program, the U.S. Federal Reserve offered buyers low-cost loans that were used to buy new bonds backed by auto and student loans. Investors could walk away from the loans if they went south and lose only a portion of their investment. A meeting of all 27 European Union finance ministers is set to take place Friday and Saturday. Investors will be looking for signs that policy makers are ready to take steps to ensure the implementation of the July 21 agreement by heads of state to enhance the power of the EFSF and provide a second bailout for Greece. A spat triggered by Finland’s demand for collateral from Greece in return for Helsinki’s participation in a second bailout program has raised tensions. Moreover, uncertainty over Greece’s ability to meet deficit criteria needed to secure its next round of funding under its bailout has stoked fears of a potential near-term default. That’s contributed to worries about Europe’s banking system and fears that a default by Greece could trigger a global financial crisis. “Everyone and their cousin is going to be looking for some kind of defining action from today’s meeting,” said Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y. “The huge risk that we face on Monday is that the meeting in Poland will end without a concrete action plan that can be implemented immediately,” he said. Markets were cheered earlier this week after French President Nicolas Sarkozy and German Chancellor Angela Merkel vowed Greece would meet its obligations and remain in the euro zone. The remarks came after a conference call Wednesday with Greek Prime Minister George Papandreou. On Thursday, the European Central Bank, in coordination with the U.S. Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank, announced it would provide additional dollar liquidity to banks. The move was seen as pre-emptive effort to head off growing tensions in the interbank lending market tied to worries abut the exposure of banks, particularly in France, to Greek debt. The announcement boosted risk appetite, sending European and U.S. shares higher while lifting the euro and forcing U.S. Treasurys and German bunds to give back some of their recent safe-haven gains. But Weinberg said more concrete measures from policy makers aimed at directly addressing the fears over the banking sector’s exposure to sovereign debt are needed to provide lasting comfort. He warned that any agreement to simply disburse Greece’s next round of aid despite the failure by Athens to meet its deficit targets would fail to soothe markets. “Billions of euros have been spent to buy time for Greece to produce fiscal reforms that are not forthcoming,” he said. “Markets will not be placated by another cash disbursement to Greece.” Ministers are expected to further discuss the possibility of developing a “euro bond” that would be issued collectively by the euro zone. Such a move would lower borrowing costs for weaker euro members, but would likely raise borrowing costs for stronger members. Such an effort remains opposed by Germany. Ministers are also expected to focus on efforts to prevent the spread of the crisis to Italy, the region’s third-largest economy, and Spain, its fourth-largest. The ECB has reluctantly but aggressively bought bonds since early August in an effort to drag down bond yields in both countries. The measures are widely seen as a temporary measure to keep borrowing costs from rising to unsustainable levels until national parliaments approve the proposed changes to the EFSF, which will allow the fund to buy bonds in the secondary market. But doubts remain over the EFSF’s firepower. “With the lending capacity of the EFSF limited to €440 billion, its funds may last just for 6 months if the EFSF were to intervene at the same pace as the ECB did over recent weeks,” said Tobias Blattner, European economist at Daiwa Capital Markets in London. Translating the U.S. TALF program to the euro-zone crisis, meanwhile, would imply using EFSF resources to provide credit protection to the ECB’s purchases of government bonds rather than directly intervening in secondary markets, analysts said. That may be a tough sell, however, given the ECB’s already controversial program of buying distressed bonds. A dispute over the program is widely thought to have triggered the resignation last week of long-time ECB Executive Board member Juergen Stark. “Any scheme that will require the agreement or direct involvement of the central bank is likely to be fiercely opposed by the ECB as the current bond purchase program is already highly disputed among policy makers,” said Blattner, a former ECB economist. William L. Watts is a reporter for MarketWatch in Frankfurt.

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