“Geithner is right. You have to hit the problem on the head with a sledgehammer,” said one Asian official familiar with the G-20 discussion, who asked not to be identified.
British treasury chief George Osborne said the G-20 meeting and communique were meant as a message to the euro zone that time is running out.
“What is required is a sense that there is enough government and central-bank firepower” to guarantee banks and governments in the region will not fail, Osborne said. “It is fairly clear that patience has been running out in the international community.”
Britain is not part of the euro zone and maintains its own currency.
The ultimate role of the ECB is one of many contentious issues the euro area needs to confront. Euro-zone countries are struggling to ensure Greece does not default and are pressuring the Mediterranean nation to make good on spending cuts in return for international loans. The region’s leaders, meanwhile, are pressing nations such as Italy and Spain to keep their budgets on track as well and are debating how to deal with a possible banking crisis arising from the large sum of risky government bonds held by financial firms.
The European countries have set up a rescue fund, the European Financial Stability Facility, that could raise around $600 billion to support governments and banks. The fund must be approved by the euro area’s 17 national parliaments, a process expected to be completed by Oct. 14.
But the amount of money is not considered enough to prop up Italy if it was to founder, or to stand behind the region’s financial system if banks begin to falter.
Officials from the United States, the International Monetary Fund and the G-20 are pressing euro-zone leaders to drastically expand what the rescue fund can do and, in the words of the G-20, “maximize its impact.”
That could be done in a variety of ways, including an approach that would use money from the rescue fund in concert with the ECB.
Geithner has supplied an example that dates to the financial crisis. When he was head of the New York Fed, he combined money from the Treasury Department and the Fed to create a $200 billion program to buy troubled securities.
Using similar techniques, the ECB could turn the rescue fund’s $600 billion into several trillion dollars, in effect putting the central bank’s unlimited financial power behind European governments and financial firms.
It won’t be an easy sell at the central bank. According to European officials, ECB authorities said at the meeting in Wroclaw, Poland, that they thought such ideas violated European laws that forbid the bank from financing governments or “monetizing” government debt.
But European officials such as Rehn, in principle, have supported the need to expand the rescue fund’s fire power. There is, however, a reluctance to discuss the idea openly until national legislatures have approved the fund, for fear that fiscal conservatives in Germany or elsewhere might worry they are writing a blank check.
Private analysts have begun to argue for the idea as well, saying that, ultimately, without a central bank behind them, governments such as Greece and Italy will be viewed no differently than a company or individual that wants to borrow money.
“It is the government’s recourse to the central bank’s printing press that separates sovereign debt from other forms of debt,” Morgan Stanley analysts wrote in a recent paper on the euro zone. “An end to the crisis is unlikely without an unlimited lender of last resort.”