G20 Heated Debates; Europe Politely Tells Geithner Where To Go

[MNeagle]

Demands for more stimulus fell by the wayside as concern over sovereign defaults and budget deficits caught the attention of G20 participants. Reading between the lines, it seems Europe politely told Geithner to go to hell.

G-20 Officials Had Heated Debate on Europe

South Korea's deputy finance ministers says G-20 Officials Had Heated Debate on Europe

There’s been “a lot of heat” in the discussions, Shin Je Yoon, deputy minister for international affairs at South Korea’s finance ministry, told reporters in Busan today during a break in a meeting of G-20 officials.

Shin said the European crisis was the dominant issue discussed by G-20 officials, with mixed views about the possibility of the region’s sovereign-debt woes spreading to other parts of the world.
Hot Air From Geithner on the Yuan

Geithner Says G-20 Discussed More Flexible China Yuan Policy

Finance officials from the Group of 20 nations discussed how a shift towards a higher U.S. savings rate can be complemented by a “more flexible exchange rate policy” in China as well as stronger domestic demand in Japan and Europe, Treasury Secretary Timothy Geithner said today after a meeting in Busan, South Korea.
That discussion was totally useless. China will do what it wants when it wants until the market (not hot air from Washington) forces China's hand.

G20 Drops Support For Fiscal Stimulus

The Financial Times reports G20 drops support for fiscal stimulus.

Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction.

The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, also dropped proposals for a global banking levy, instead giving countries leeway to do what they thought best for their domestic circumstances.

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.

Many other finance ministers accepted market realities had changed the G20’s policy, Christine Lagarde, French finance minister, said: “There’s a large majority for whom redressing the public finances is priority number one. For a minority, it’s supporting growth”.
The Minority Speaks

Speaking for the minority, Geithner Tells G-20 Reliance on U.S. Will Curb Growth.

Treasury Secretary Timothy Geithner told his Group of 20 counterparts that the pace of the global recovery depends on domestic demand in Japan and Europe, and countries shouldn’t rely on spending by U.S. consumers.

“The necessary shift towards higher savings in the United States needs to be complemented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand” and end to the yuan peg in China, Geithner wrote in a letter before a two-day G-20 meeting in Busan, South Korea that ended today.

Geithner’s remarks underscore signs of differences over how quickly to rein in public spending, with the Treasury chief warning that fiscal tightening won’t “succeed unless we are able to strengthen confidence in the global recovery.” French Finance Minister Christine Lagarde said yesterday that budget consolidation is “priority No. 1” for most G-20 members.

European Central Bank President Jean-Claude Trichet told reporters that Europe’s best contribution to the global rebound is to achieve fiscal sustainability.

There’s been “a lot heat, a lot of heat,” in the G-20 talks, Shin Je-Yoon, deputy minister for international affairs at South Korea’s finance ministry, told reporters today.

“I continue to say that I see good news from the current euro-dollar rate,” French Prime Minister Francois Fillon told reporters yesterday in Paris. President Nicolas Sarkozy “and I have been saying for years that the euro-dollar rate didn’t reflect reality and was penalizing our exports,” he said.

Wanting The Impossible

French President Nicolas Sarkozy comments on the Euro highlights the impossible task of making everyone happy. The US, EU, UK, Japan, and China all want a weaker currency. It cannot be done.

Nothing But Hot Air

The G-20 meeting was useless. The market had already forced Europe's hand with the action in credit defaults spreads in Greece, Portugal, and Spain as compared to Germany.

The same thing happened in the UK when Gordon Brown was tossed out of office.

US, Japan, China Day of Reckoning is Coming

Trichet's comment that the best contribution to the global rebound is to achieve fiscal sustainability is certainly accurate. Unfortunately, that comment will fall on deaf ears as Geithner, Bernanke, and the Obama Administration clowns are completely clueless.

At some point, the market will get extremely tough with the US, China, and Japan in regards to deficit spending, interest rates, currency pegs, and financing debt. However, there is no telling exactly when those days of reckoning will come or in what order they happen.

Kiss the Illusion Goodbye

With global stimulus efforts playing second fiddle to default concerns, a double-dip recession is just around the corner. Please see Hungary Tries To Calm Markets; Europe Headed Back in Recession, US Will Not Decouple for further discussion.

The Keynesian clowns will be howling that reduced stimulus killed the recovery. However, the reality is there was no recovery in the first place, only an illusion caused by unsustainable stimulus.

Mike "Mish" Shedlock

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[Trinity]

I'm thinking all this pressure on Europe is designed to get their central bank to monetize debts like the U.S. and England did. JMHO

ECB rift over bond buys adds to euro pressure
Germans said to fret secret French bailout


By William L. Watts, MarketWatch

LONDON (MarketWatch) -- The European Central Bank's decision to purchase distressed government bonds issued by peripheral euro-zone governments has helped soothe credit markets, but aren't doing much to buoy up the beleaguered euro.

An apparent rift between top ECB officials, which has even featured German media accusations of a French-led "conspiracy" aimed at shoring up French banks, hasn't helped, economists said.

A report in the German magazine Der Spiegel over the weekend said the ECB's purchases of Greek bonds, despite the fact Athens has already received money from a 110 billion euro ($134.4 billion) European Union rescue fund, had led German central bankers to suspect a French plot.
Technicals suggest euro to drop below $1.20

The push into fresh 2010 lows below 1.2143 in EUR/USD represents an effective 17% drop for the beleaguered euro since setting its 2010 high at 1.4580 in January, but there's scope for further downside to the 1.2000 level and the 1.1721 target.

After all, the report said, the move gives French banks an opportunity to unload Greek bonds, while German banks must sit on their hands after promising German Finance Minister Wolfgang Schaeuble they would hold Greek debt until 2013.

"The main issue in the public debate is why Greek bonds are being bought although the aid program for Greece has long since been passed and first funds have been transferred," said Ulrich Leuchtmann, head of currency strategy at Commerzbank in Frankfurt.

"The purchase of Portuguese or Irish securities on the other hand makes much more sense, as the general rescue fund for euro-zone countries has been agreed but not set up yet."

If German central bankers suspect a conspiracy, they haven't expressed it publicly.

German Bundesbank President Axel Weber on Monday did make it clear he's not a fan of the policy, arguing for a strict cap on purchases. Weber, seen as a potential successor to Trichet, warned that the program carries "substantial stability risks."

That puts him at odds with ECB President Jean-Claude Trichet, who has used a series of interviews in an effort to overcome qualms the bond purchases could spark inflationary pressures.

Trichet has argued that the moves fall short of creating new money through quantitative easing and that the ECB remains focused on maintaining price stability.

Bond purchases have totaled at least €35.5 billion over the first three weeks of the program, according to ECB figures, which don't offer a regional breakdown of the purchases.

"We do not participate in speculation abut possible conspiracies in the purchase of Greek bonds," Leuchtmann said, adding that it is "a lack of transparency" that inevitably leads to such suspicions.

"Even though the ECB publishes data on how many bonds have been purchased it does not state what securities these are," he said. "Also the issue of how long these purchases will continue remains unclear. As a result, the question of what would happen on the bond markets if the ECB would stop the purchases is putting pressure on the euro."

http://www.marketwatch.com/story/ecb-rift-over-bond-buys-adds-to-euro-pressure-2010-06-02?siteid=rss&rss=1