Out of Office, Geithner’s View on U.S. Exposure to the Euro Crisis Shifts

 The Wall Street Journal

By  IAN TALLEY

Don’t panic. There’s nothing to worry about.

That’s essentially what former U.S. Treasury Secretary Timothy Geithner said in 2011, when asked if Europe’s crisis threatened the U.S. financial system. “No, absolutely no,” Mr. Geithner told House lawmakers in an October 7 hearing. “The overall picture is very limited direct exposure,” he said.

That’s contrary to the narrative presented Wednesday by Mark Sobel, who had a front row seat to the crisis as a top Treasury diplomat and is now the administration’s nominee to represent the U.S. on the International Monetary Fund’s executive board.

“Had Greece defaulted or left the euro at the time, I feel there would have been potentially massive contagion also within the euro zone,” Mr. Sobel told a Senate nomination hearing Wednesday. “This would have had a tremendously detrimental impact not only on the — not only on the world but particularly in the U.S.,” he said.

U.S. banks had a trillion-dollar exposure to European banks that held Greek sovereign debt.

Now out of public office, Mr. Geithner himself paints a far more dire picture in his new book “Stress Test” than the one he described as a U.S. official.

“The renewed turmoil in Europe threatened the U.S. financial system,” Mr. Geithner wrote.

If his advice to Europe on debt restructuring is any guide, Mr. Geithner may have been worried about inciting further panic in U.S. markets.

“I told them that at some point they might be able to safely restructure the debts of weaker governments and banks, but right now they shouldn’t even be discussing it publicly,” he wrote. Talking about debt haircuts would only accelerate market sell-offs, he said, even if it was something that officials were discussing.

Perhaps that’s also why the IMF repeatedly said debt restructuring wasn’t being considered at the time, even though later evidence showed the fund and its bailout partners were very much considering Greek debt cuts.