US Treasury Secretary Timothy Geithner is making a one-day trip to Poland this week for an unprecedented meeting with eurozone finance ministers, as growing fears of a potential Greek debt default rip into Europe’s banking sector.
The trip comes as a surprise, since Geithner returned only on Saturday from a meeting of G7 finance ministers in Marseilles, France, where he said Europe’s strongest economies must offer “unequivocal” backing to the weakest.
Geithner is expected to attend the eurozone meeting on Friday and then return to Washington. The US Treasury said on Monday only that he would discuss efforts to boost global recovery and cooperate on financial regulation, but US attention is focused on risks posed by potential European debt contagion.
The danger that a Greek debt default could roil bigger European economies was underlined on Monday, when heavily exposed French banks’ shares plunged and investor confidence in the eurozone’s ability to surmount a sovereign debt crisis ebbed.
Underscoring concerns by the US about the global economic dangers from Europe’s debt troubles, the US Treasury Department said Geithner would meet with IMF Managing Director Christine Lagarde yesterday.
Geithner’s trip to Europe marks the first time a US Treasury secretary would attend a meeting of eurozone finance ministers. However, it is not the first time he has tried to push Europe into acting more decisively to cope with its debts.
In March, he made a quick one-day trip to Germany just days ahead of a EU summit to meet his German counterpart, Wolfgang Schaeuble, and to urge European countries to step up their efforts to handle the crisis.
He held a one-on-one session with Schaeuble again in Marseilles on Friday, but neither side would talk about what was discussed in that session.
On Monday, shares in Societe Generale, BNP Paribas and Credit Agricole slumped more than 10 percent, amid expectations of an imminent downgrade by credit ratings agency Moody’s, because of their exposure to Greek bonds.
The surprise resignation of European central bank chief economist Juergen Stark on Friday and weekend comments by German politicians suggesting Athens may have to default and be “suspended” from the eurozone, drove the euro to a 10-year low against the yen and a seven-month low against the US dollar, though it later recovered some ground.
“Europe is not just lurching from one crisis to another. It is lurching into a new one before the previous one is solved,” said Makoto Noji, senior strategist at SMBC Nikko Securities.
The storm on Monday forced SocGen, the hardest-hit French lender in recent weeks, to announce further drastic measures it denied only last week were under consideration, speeding up asset disposals and deepening cost cuts to free up 4 billion euros (US$5.43 billion) in fresh capital.
The bank’s market value has shrunk from 110 billion euros in mid-2007 to just 12 billion euros on Monday. The bank’s chief executive said that there were no discussions regarding possible state intervention.
French Finance Minister Francois Baroin said French banks were solid enough to withstand any crisis in Greece, and Bank of France Governor Christian Noyer rushed out a statement saying French banks were not at risk.
“There is no crisis for the banks because those that are currently being hit on the markets have all the necessary means to offer solutions,” Baroin said, adding that G7 central banks were committed to providing “as much liquidity as banks need.”
French banks and insurers are not only the biggest foreign holders of Greek government bonds, both directly and through Greek subsidiaries, but are also major creditors of Italy, which is increasingly in the markets’ firing line.
Moody’s is expected to downgrade Italy’s “Aa2” sovereign rating this week, Richard Kelly, head of European rates and FX research at TD Securities said, noting that both Fitch and Standard & Poor’s already had lower ratings for Rome.
The Financial Times reported on its Web site on Monday that Italy has asked China to make “significant” purchases of Italian debt.
The chairman of China Investment Corp (CIC) headed a delegation to Rome last week, following a visit two weeks ago by Italian officials to Beijing to meet CIC and Chinese State Administration of Foreign Exchange officials, the report said.
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