July 30, 2010  Print Email | US helps car part makers while EU keeps lid on spending
Taxpayers' money can't solve everything
Posted by Agencies at 08:56 AM GMT on Mar 20, 2009 | BRUSSELS/WASHINGTON (Reuters): Washington has added another $5 billion to its skyrocketing rescue bill, throwing a lifeline to stricken auto parts makers, while the European Union is resisting pressure to pump more cash into its recession-hit economies.
 EU leaders are expected, however, to agree today to contribute at least $75 billion to the International Monetary Fund to boost its firepower in the face of the worst global downturn in decades.
The IMF warned the world economy could shrink as much as one per cent this year, in its first contraction since World War Two. It also said international coordination and quick steps to purge banks' balance sheets of "toxic assets" were needed to produce a gradual recovery next year.
The EU leaders also backed the proposal to double to €50 billion ($67.5 billion) an EU crisis fund for eastern European nations not sheltered by being part of the single euro currency zone.
But they defended the stimulus packages they have already launched, despite calls led by Washington for Europe to spend more and after the Federal Reserve's dramatic decision on Wednesday to pump further $1 trillion into the limping economy.
"A competition to outdo each other with promises will not calm the situation," German chancellor Angela Merkel told German parliament before the 27-nation bloc's summit.
On Thursday, the US government promised $5 billion to auto parts suppliers crucial to the survival of US car makers, in the latest effort to buttress the economy now in its 15th month of recession.
RECKLESS SPECULATION
President Barack Obama has pushed through a $787 billion stimulus package and his administration has given $17.4 billion to its struggling car makers to prevent their collapse and save thousands of jobs, with jobless numbers already at record highs.
But public rage over $165 million in bonuses paid by insurer American International Group after it was saved by a $180 billion bailout, continues to haunt Washington's $700 billion financial industry rescue, seen as crucial for economic recovery.
To contain the outrage over what Obama described as a symptom of "a bubble and bust economy that valued reckless speculation over responsibility and hard work", the House of Representatives slapped a heavy tax on the AIG bonuses to recoup most of the payments.
A House panel is also set to consider legislation that will prohibit bonus payments by bailed-out companies until they fully repay public funds.
The aggressive move by the Fed to pump more liquidity into the system, which initially buoyed global financial markets by inspiring optimism about the chances of US and world economic recovery, got mixed reviews once investors had more time to digest the possible implications.
The dollar was hardest hit, heading for its worst week in 24 years due to fears that by printing more money the Fed will create a glut of the world's main reserve currency and lead to resurgence of inflation in the future.
"This is a historic moment, the start of the debasement of the world's reserve currency, and it feels too many participants that in the grand sweep of history we are witnessing the end of 'Rome' on the Potomac," said Alan Ruskin, a RBS strategist.
Stock market sentiment also soured after an initial rally, reflecting worries that the Fed ventured into uncharted waters with its decision to buy $300 billion of US Treasuries, with little certainty whether the gambit would pay off.
With Tokyo closed for a holiday, Asia-Pacific stocks edged lower after the US S&P 500 index slipped 1.3 per cent overnight.
Banks, which led the recent rally on signs that business was improving, have been busy shoring up their capital depleted by the worst year for the sector in living memory.
HSBC Holdings won approval for its record 12.9 billion ($18.7 billion) rights issue while Citigroup began an offer to swap billions of dollars of preferred shares into common stock.
UBS AG said it would buy back up to €1 billion of bonds, which are now trading at a discount. The Swiss bank also said it will seek shareholder approval to raise an extra 10 per cent of equity capital if needed.
SEEKING UNITY
As leaders of the world's top economies gear up for the Group of 20 meeting in London on 2 April on the global economic action plan, the EU wants to present a united front there.
But some EU governments are under pressure to do more from growing signs of social unrest. French president Nicolas Sarkozy attended the summit on a day of mass protests over his handling of a crisis which could push Europe's unemployment rate towards 10 per cent this year.
But the EU leaders said taxpayer money was not a cure all to the crisis triggered by excessive risk-taking by some of the world's top financial institutions. Many favour tightening regulation rather than running up huge deficits that could put strains on the euro single currency, whose bedrock has been years of fiscal austerity.
"You can't think you can solve everything with taxpayers' money. Stimulus packages are already in place and taking us through this challenging time. We already have done a lot," said Swedish prime minister Fredrik Reinfeldt.
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