US raises pressure over euro debt crisis

The US has raised pressure on eurozone leaders to take decisive action to solve the debt crisis, by lowering troubled members’ borrowing costs, before a crucial European Central Bank meeting.

US Treasury Secretary Timothy Geithner said the eurozone must take steps including “bringing down interest rates in the countries that are reforming and making sure those banking systems can provide the credit those economies need”.

Italy and Spain could lose access to credit markets as the risk premium that investors demand to hold their bonds rather than safe-haven German debt has spiralled to levels considered unsustainable in the long term.

Italian Prime Minister Mario Monti said Draghi’s pledge last week to do whatever it takes to preserve the euro were “bold and appropriate”.

He predicted that the future permanent rescue fund, the European Stability Mechanism (ESM), would “in due course” be granted a banking licence so it could tap ECB funds to buy almost unlimited amounts of bonds. However, German vice-chancellor Philipp Roesler rejected pressure for the ECB to step in and cap the borrowing costs of troubled states, saying the central bank should stick to fighting inflation.

“If you take away the interest rate pressure on individual states, you also take away the pressure on them to reform,” Roesler, economy minister and leader of the Free Democrats, junior partners in chancellor Angela Merkel’s coalition said.

He also reasserted Germany’s firm opposition to letting the ESM borrow from the central bank, dubbing that “the road to an inflation union”.

Draghi’s comments last week stirred speculation that the ECB might take more radical steps when its policy-setting Governing Council holds its monthly meeting today.

Geithner said Schaeuble and Draghi had walked him through plans they were putting in place to try to solve the crisis. Past financial crises showed that the longer it took to address the issues, the more they cost.

“I believe they understand that. That’s why they’ve signalled they are prepared to move further. Now again, this is going to take time,” he added.

Meanwhile, Monti, touring Europe to press for action to bring down Rome’s borrowing costs, made his pitch to eurozone hardliner Finland saying Italy did not need an assistance programme but might in future need “a breathing break”.

The ECB could revive its mothballed sovereign bond-buying programme in tandem with the eurozone’s rescue funds, but Spain would first have to request assistance, which it has resisted so far.

Eurozone leaders would have to agree to the rescue funds buying up government bonds, and the German Constitutional Court would have to uphold the legality of the bloc’s permanent rescue fund.

Reuters