January 27, 2012ECB chief, Geithner fuel hopes of taming euro crisis
European Central Bank president Mario Draghi said Friday the eurozone had made "outstanding" progress towards resolving the debt crisis as hopes grew for an imminent deal on Greece's debt burden.
US Treasury Secretary Timothy Geithner also praised Europe's efforts to turn the corner, saying recent moves had bolstered the single currency's credibility.
Speaking at the Davos forum, Draghi said that many of the fundamentals which sparked the financial crisis four years ago had now been addressed although he did urge governments to act faster to put their battle plans into action.
"The amount of progress is outstanding," said Draghi. "If you compare today with even five months ago, the eurozone area is another world."
Draghi said that the fiscal compact most European states are negotiating is crucial to efforts to resolve the crisis, praising governments' willingness to give up sovereignty. The compact will be discussed at an EU summit on Monday.
Draghi said a lack of regulation was one of the main causes of the crisis, as well as underlying flaws in the banking sector.
"The time that has elapsed since then has seen an extraordinary development in the regulatory policy design. Much has been discussed and put on paper," he said, adding that there had been "relatively less policy implementation".
"Very much has happened in the positive sense in the market place. Banks today have more capital, less debt, somewhat more immune from the perverse incentives that characterised the crisis," said the Italian.
Draghi's optimistic assessment came after EU economic affairs commissioner Olli Rehn said the Greek debt agreement may be hammered out before Monday's summit.
"We're very close," he told Davos. "They're about to close a deal, if not today maybe over the weekend, preferably in January rather than February."
As he spoke in Switzerland, the Greek government was in talks with private creditors on a voluntary exchange of bonds that would wipe 100 billion euros ($130 billion) off the country's debt of 350 billion euros.
The deal under discussion in Athens would see private creditors take a "haircut" of at least 50 percent on 200 billion euros in debt. Previous talks stalled over the amount of interest to be paid on the remaining debt.
Any failure to strike a deal could trigger a messy default, which would be an economic disaster for Greece itself and a threat to banks holding too much sovereign debt while piling pressure on other eurozone states.
Speaking at the same debate, German Finance Minister Wolfgang Schaeuble said he expected Greece to avoid a default but he warned its debt level should not exceed 120 percent of GDP.
"We don't expect a default of Greece," he said. "I know that most participants have for a long time, but I don't expect a default from Greece. I'm sure that everybody is ready to deliver what has been agreed."
The head of Germany's top bank, Deutsche Bank, also said he was confident a solution could be found to Greece's woes.
Josef Ackermann said the "haircut", or losses that banks were being asked to take on their holdings of Greek debt, was "almost 70 percent."
"That is a great, great deal. But everyone has to make their contribution and then we will see where we are. We're going to carry on," he told Germany's NTV.
Speaking the day after the Federal Reserve cited the eurozone crisis as a reason for cutting its growth forecast, US Treasury Secretary Timothy Geithner said there were signs that the worst of the crisis was over.
"Europe is making some progress," he told delegates, saying that over the past two months they had laid the foundations for a "more credible framework".
"We have three new governments (Italy, Greece, Spain) doing some very tough things, an ECB doing the things you have got to do."
The annual forum has been marked by gloom about the state of the global economy, and in particular about Europe's struggle to cope with yawning public deficits while at the same time seeking growth and jobs.
The euro has been under pressure -- amid fears that Greece or even eventually a giant like Spain or Italy could default on its debts -- and the 17-nation currency bloc is on the brink of renewed recession.
Davos has reverberated with calls for eurozone nations to act decisively to restore confidence, with Mexican President Felipe Calderon calling on Europe to "bring out the bazooka immediately" to prevent the problem from sinking Italy and Spain.
Geithner said Europe needs a "stronger and more credible firewall" and hinted that the US and emerging economies could supply the International Monetary Fund with more funding to help the eurozone rescue effort.
"If Europe is able to do that, we believe that the IMF can play a substantive role. It can't be a substitute for a European response," he said.
Further fuelling the mood of optimism, Italy successfully passed another market test by selling 11 billion euros ($14.5 billion) in short term bonds at sharply lower rates.
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