Geithner Says Global Economy Faces Setbacks on Recovery Path
U.S. Treasury Secretary Timothy Geithner said the global economy probably will suffer setbacks during its recovery as nations adapt to a loss of wealth and a surge in public debt.
“This crisis has been brutal in the extent and severity of damage to economies around the world,” Geithner said in the prepared text of a speech in Jeddah, Saudi Arabia. “Given the extent of damage to financial systems, the loss of wealth, the necessary adjustments to a long period of excessive borrowing around the world, it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.”
Economies will need to start growing again before jobs can be created, he said. He also said credit conditions will remain “unusually tight,” even though markets have opened up somewhat in response to government actions.
The U.S. yesterday reported a $1.1 trillion budget deficit for the fiscal year that began Oct. 1. Geithner’s visit to Saudi Arabia and the United Arab Emirates, two of the oil-exporting countries that are the fourth-largest holders of Treasury debt, comes as the U.S. braces for a projected 2009 budget deficit of $1.8 trillion, more than four times the previous fiscal year’s $459 billion shortfall.
“The U.S. needs to raise a lot of debt over the coming months and at a time when there’s talk about the dollar’s status as a reserve currency, they need to convince people that hold the debt that the U.S. is committed to fiscal responsibility in the medium term,” said Eric Swats, Dubai-based head of asset management at Rasmala Investments, which has about $1.2 billion under management, in an interview ahead of Geithner’s visit.
U.S. Borrowing
The U.S. Treasury chief sought to address both concerns in his prepared remarks. He pledged that the U.S. would take steps to rein in its borrowing while also attempting to address health care, financial regulation and other long-term issues.
“The United States was on an unsustainable fiscal path before this crisis, and we will not succeed in establishing sustainable recovery without a credible commitment to address our long term deficits,” Geithner said.
At the same time, the U.S. understands it has responsibilities as a leader of the global economy, he said.
“Given the dollar’s role in the international financial system and the significant impact of the U cash advance.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play,” Geithner said.
Global Response
Around the world, governments have taken steps to combat the financial crisis that have “substantially reduced the risk of much deeper and more prolonged global recession,” Geithner said. He said he sees several indications of stabilization and improving confidence in the U.S., along with “initial signs” of global progress.
European economies are shrinking more slowly and there are similar signs in Japan, Geithner said. He also said China is helping other Asian economies after successfully using government policy to increase demand. Growth prospects also are improving in Brazil and other parts of Latin America, he said.
Geithner praised Saudi Arabia’s efforts to diversify its economy away from energy-related businesses. Later today, he is scheduled to visit the city of Yanbu to attend an economic development event with King Abdullah, the U.S. Treasury said.
“The world has yet to fully appreciate the scale of ambition and investment we are seeing in the Kingdom and the Gulf region to lay the foundation for future growth,” Geithner said. “You are diversifying your economies to build a future less dependent on oil and natural gas.”
Iran Sanctions
Geithner’s first visit to the Mideast as Treasury chief is aimed at explaining to allies and trading partners the state of the U.S. economy and shoring up their support for efforts to stop Iran’s nuclear program, stabilize Iraq and quell violence in Afghanistan, U.S. officials, who declined to be identified, said in a briefing last week.
Geithner is visiting the U.K., Saudi Arabia, the United Arab Emirates and France this week. In addition to possible new sanctions on Iran, he’ll also discuss the global economy, the upcoming Group of 20 summit in Pittsburgh, Pennsylvania, and efforts to prevent terrorism financing, the Treasury officials said in a briefing with reporters in Washington. In Abu Dhabi tomorrow, he’s also scheduled to meet with officials from two sovereign wealth funds.