Treasury Secretary Tim Geithner appeared on Wednesday at the CNBC “Delivering Alpha” conference in Manhattan and was interviewed by Jim Cramer (Mad Money). Cramer asked Geithner if he thought there could be a Lehman Brothers type of collapse in Europe, to which he answered, without hesitation, “no chance.”
Mr. Geithner acknowledged that European regulators had traditionally been more “indulgent” of their banks, given the institutions’ close ties to their governments. But European governments and banking authorities realize they need to shore up their banking institutions, he said. “They recognize they have to do more. They recognize they’re behind the curve.”
Cramer asked the Secretary if Europe would be alive and meaningful, or dead, in several months, and Geithner quickly replied “alive.”
Sec. Geithner made an unusual trip to Europe last Friday to attend the G-7 meeting in France. It is obvious that the Obama administration is increasingly concerned about the troubling financial situation in Europe. Geithner will return to Europe again on Friday to attend the Economic and Financial Affairs Council (“EcoFin”) meeting. This meeting includes financial ministers from all 27 Eurozone countries.
Geithner confirmed at the CNBC conference on Wednesday that his sole mission is to pressure the financial authorities in Europe to move ahead and bail out the struggling nations such as Portugal, Ireland, Italy, Greece and Spain (the so-called PIIGS).
Geithner pointed out several times that the stronger nations of Europe and the European Central Bank (ECB) have, or can create, the money to bail out the weaker countries and preserve the euro currency. He added, “There is no chance that the major countries of Europe will let their institutions be at risk in the eyes of the market.” He cited remarks from German Chancellor Angela Merkel as evidence that European leaders are working to avoid a Lehman-like scenario.
As I have argued in my July 19, August 9, August 16 and September 6 weekly E-Letters, I believe that the financial chaos in Europe is THE biggest negative affecting the US stock markets, which plunged almost 20% in just 12 trading days in late July and early August when fears of a Greek default intensified.
While the US equity markets have seemed to stabilize somewhat since the early August lows, there is no assurance that we’ve seen the bottom. While the ECB has come to the rescue, there is little disagreement that it lacks the capital to continue large bond purchases from the PIIGS.
The key remains the fate of the European Financial Stability Facility (EFSF) bailout fund. Eurozone leaders are trying to more than double the size of this fund to at least a trillion euros so that it can take over for the ECB. But this critical move has to be approved by all of the 17 Member States and funded by those countries that are not in trouble.
On Wednesday of this week, the Finance Committee of the Austrian parliament voted down a proposal to fund its part of expanding the EFSF. This sent markets lower in Europe, but Austrian financial authorities were quick to assure the public that the no vote was simply a delay of the eventual vote, probably into October, when they expect it to pass.
No doubt, approval for funding the expansion of the EFSF will be difficult to obtain in virtually all EU governments that are asked to chip in, including Germany which will be by far the largest contributor.
The bottom line is that this Eurozone crisis is far from over, and you should plan on more negative surprises. Every day that the bailout is postponed pushes Greece closer to the cliff and default. These negative surprises will continue to weigh on the US and European stock markets, in my opinion.
Finally, there is an old saying in political and economic circles: “Never believe anything until it has been officially denied.” One wonders if Tim Geithner’s “no chance” answer to the possibility of a Lehman-type collapse in Europe qualifies as a denial. I would say, yes!
Gary’s Reading Room
Being in the writing (as well as investing) business, I am a voracious reader. Fortunately, I am a speed-reader (around 2,000 words a minute, depending on the complexity), so I probably read a lot faster than most.
Since I do read so much, I thought I would include links to an article or two that I found very interesting. Today’s link is an article discussing how President Obama’s policies often result in the opposite of their intended effects and/or have unintended consequences. Here’s the link:
http://www.washingtontimes.com/news/2011/sep/12/devoid-of-reality
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