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America insists on speedy end to turmoil in eurozoneAmerica has demanded a "commitment of significant resources" from Europe to stem its debt crisis as the US announced a shock cut to its growth forecast.
By Louise Armitstead, Chief business correspondent
10:08PM GMT 22 Nov 2011
Amid growing US impatience with European indecision, William Kennard, the American ambassador in Brussels, insisted on faster and more radical action.
The US Department of Commerce said America’s economy was slowing and would grow by just 2pc rather than the 2.5pc expected. A drastic drop in confidence was responsible, shown by the first fall in business inventories for two years. Analysts said the fact businesses were drawing on their reserves rather than ordering new stock was proof that the debt crisis was causing global concern.
Rob Carnell, an economist at ING, said the US data “will have come as a shock to markets”. He said: “It marks the first genuinely disappointing US data release for some time.”
Mr Kennard told reporters in Brussels: “There needs to be a firewall, a commitment of significant resources to deal with the problem.” He waded into the intensifying row over the role of the European Central Bank (ECB), on the side of France and Britain, rather than Germany.
He said the inability of the ECB to back the euro, in the way that the Federal Reserve stood behind the US economy in 2008, was a “fundamental difference in our structure”.
He said: “We are watching very intently what the ECB is able to do and the potential for it to do more.”
The warning came as the Federal Reserve said it plans to stress test America’s six biggest banks to see how they would withstand a potential meltdown of Europe’s financial system.
The tests on Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo will include “potential sharp market pricer movements in European sovereign and financial sectors,” the Fed said yesterday. The European examination for the six biggest banks is part of a broader annual stress test of the country’s 19 most significant lenders.
It was another turbulent day on global stock and bond markets. In the wake of Spain’s ruinously expensive debt auction, Italian 10-year bond yields soared to 6.91pc - just below the 7pc “bail-out zone”. After rising initially, stock markets fell. The Euro Stoxx dropped 1.1pc; Italy’s MIB and Spain’s Ibex fell 1.5pc each and Germany’s DAX dropped 1.2pc. In London the FTSE slid 0.3pc.
In late trading, the euro rallied against the dollar after the International Monetary Fund (IMF) unveiled a new credit line programme to support countries outside the eurozone hit by the debt crisis.
The IMF said the Precautionary Liquidity Line – which is strictly not for sinner states – would fund countries whose debt and spending levels are prudent but which have short-term funding problems. Christine Lagarde, head of the IMF, said: “This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.” The move is unlikely to calm markets for long.
“Europe’s sovereign debt problem is now chronic,” said analysts at Forex.com. They argued that the markets were rattled “because [in Europe] there is no 'lender of last resort’ or ultimate financial backstop in place in the currency bloc, the absence of which threatens its very survival”. They added: “While it may be glaringly obvious to the market that there is a vital missing piece of the eurozone jigsaw, Germany seems to be oblivious.”
Jens Weidmann, president of the German Bundesbank and an ECB policymaker,
said it was not the central bank’s job to finance public budgets. He told reporters that adopting a policy of quantitative easing – as in Britain and America – would be like drinking sea water to kill the thirst. “Whoever believes that the current crisis can be overcome by giving up crucial principles of stability orientation, pushing current legislation aside, is wrong.”
Defying the markets and a raft of economists, Mr Weid-mann insisted that Italy and Spain were strong enough to work out their own problems. “In both cases, I am confident that these countries need no outside help but rather that they can comfortably help themselves,” he said. “It is up to all of us to work against the general loss in confidence.
“Therefore, we must not limit our focus to short-term crisis fighting and nor should we adopt unseen proposals that have been developed for other currency areas,” he added.
But the “short-term crisis” looked like it was about to get worse as Portugal’s former finance minister warned that the bailed-out country could need a further €25bn (£21.6bn) to top up its €78bn rescue funds.
Carlos Pina, the treasury minister who negotiated the April bail-out package with European and International Monetary Fund officials, said that Portuguese companies were being cut off from capital markets funding in the same way that countries were, too.
Mr Pina told a conference: “There is a risk that the €78bn will not be sufficient. There may be a shortfall of €20bn to €25bn.”
Meanwhile, European officials were still refusing to disburse to Athens the €8bn tranche of its bail-out money. Jean-Claude Juncker, head of the Eurogroup of finance ministers, said he was optimistic that “within seven days” Lucas Papademos, the newly installed technocrat prime minister of Greece, would persuade the country’s politicians to commit to austerity demands so that money could be released.