Geithner Presses Euro Zone to Leverage Bailout Fund

U.S. Treasury Secretary Timothy Geithner pressed euro zone ministers Friday to leverage their 440 billion euro bailout fund and free up more resources to tackle the debt crisis, a senior euro zone official said.

Washington set up an emergency fund to support U.S. lenders during the global credit crisis but the official told Reuters Geithner made no reference to the 2008 TALF program, which sources had said could be a model for the European Financial Stability Facility.

Analysts say the EFSF must be increased in size to build market confidence that the euro zone debt crisis can be contained.

Germany and others refuse to do so and euro zone national parliaments have yet to ratify new powers agreed for the fund back in July, to allow it to give precautionary loans to countries under attack in the markets and to buy sovereign bonds to prop up struggling states.

Market sentiment lifted after the European Central Bank and those of Britain, Japan and Switzerland joined forces on Thursday to reintroduce three-month dollar liquidity operations in the fourth quarter.

World shares rose half a percent to one-week highs while the euro clung to gains from the previous session on hopes that European policymakers would finally come up with a bold plan to combat a deepening debt crisis.

That leaves scope for disappointment, not least because the central bank action denotes real concern about interbank lending drying up. Geithner's presence at the meeting in Wroclaw underscores the level of U.S. worry.

It is difficult for the euro zone to come up with anything concrete at this stage but they need to keep up the momentum, said Gavin Friend, market strategist at National Australia Bank.

Geithner gets how important all of this is ... Markets understand it will all take time to work through but they want to hear that the discussions are making good progress, that the Europeans are receptive to what Geithner has to say.

Geithner gave no details of how such leveraging could be done, the euro zone official said, perhaps wary of European sensitivities about Washington being too prescriptive.

We can always discuss with our American colleagues. I'd like to hear how the United States will reduce its deficits and ... its debt, Belgian Finance Minister Didier Reynders told reporters.

Leveraging the EFSF would be a radical new approach and could skirt objections to increasing the size of the fund outright.

One analyst said EFSF money could be used to guarantee a portion of potential losses on euro zone sovereign debt bought by the ECB, providing more purchasing clout than if it just bought the bonds in the secondary market with money on hand.

It is possible to leverage the EFSF so as to expand its headline capacity to support sovereign bonds, for example through the use of partial guarantees against first losses, said Sony Kapoor, managing director of think tank Re-Define.

One difficulty is that leveraging a fund that is underwritten by guarantees from euro zone member states could increase liabilities across the board, putting pressure on the triple-A credit rating of countries such as France.

COLLATERAL CONUNDRUM

With most economists saying a Greek default is inevitable at some point and the much larger Italian economy not out of the firing line despite parliament's approval of a new austerity package this week, the pressure is on to act.

Europe and the United States face 10 years of pain if a global solution for the euro zone debt crisis is not found soon, said former British premier Gordon Brown, one of the architects of the response to the world financial crisis of 2007-2009.

Unless there is global coordination ... I foresee 10 years of low growth in Europe and America, I foresee very high levels of unemployment and I foresee a failure of coordination that will lead in the end to greater protectionism, Brown said at the World Economic Forum in Dalian, China.

Germany continues to voice opposition to the issuance of common euro zone bonds to pool risk.

And a row over the terms of a second Greek bailout -- with some countries such as Finland demanding collateral in return for new loans -- is also unresolved.

I think we are going to negotiate about it (collateral) but unfortunately I don't see that we can find a solution tonight, Finnish Finance Minister Jutta Urpilainen told reporters. We continue to negotiate, I'm optimistic that we can find a solution that everybody can accept.

Collateral is a must for Helsinki but officials say a solution is coming together whereby it is made so expensive to demand it that other euro zone countries shy away.

Policymakers expect international lenders to be able to recommend by the end of the month releasing a vital next tranche of aid to Greece, warding off the threat of an imminent default.

While that may keep Greece afloat until it gets a second bailout package from the euro zone, its finance minister said the country would remain mired in recession through 2012, the fourth year in a row, a contraction that is only likely to fuel popular outrage at the austerity drive.

The intention is to meet the fiscal targets for this year and next year without delay, without exception and deviations, Greek Finance Minister Evangelos Venizelos told reporters in Wroclaw.

On a conference call with Greek Prime Minister George Papandreou on Wednesday, German Chancellor Angela Merkel and French President Nicolas Sarkozy voiced their support for keeping Greece in the euro zone and continuing financial assistance provided it sticks strictly to austerity measures to meet its fiscal targets.

Commenting on a debt swap plan that is a key part of a planned second bailout for Athens, the euro zone official said it would not be a big problem if fewer than the targeted 90 percent of private investors took part in the scheme.

Venizelos said the bond exchange would be implemented.

(Additional reporting by David Lawder in Washington; Writing by Mike Peacock; editing by Janet McBride)