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EU warns of protectionism, U.S. bailout awaited

U.S. Treasury Secretary Timothy Geithner is due to unveil the banks plan at 11 a.m. (1600 GMT), and a stimulus bill is expected to be passed by the Senate but could still face days of wrangling before its final approval.

Geithner pledged banks would go through “a carefully designed comprehensive stress test” to make sure their balance sheets are clean and they meet requirements for capital. The remarks were prepared for delivery when the new measures are released.

The dollar gained broadly as investors sought the perceived safety of the U.S. currency, while the euro tumbled on conflicting reports that Russian banks were seeking government help to restructure its foreign corporate debt.

Oil rose towards $41 a barrel on expectations approval of the $800 billion-plus U.S stimulus package would boost demand for oil in the world’s largest energy consumer.

But investors in all markets were generally wary of taking large positions ahead of the U.S. plan, which will likely focus on helping banks offload their toxic, or bad, assets and boost their capital.

Toxic assets on European banks’ books is high on the agenda of a meeting of European finance ministers in Brussels, but a squabble over perceived protectionism could scupper any plan to help troubled banks.

“The (EU) Presidency thinks that the biggest risk at the moment is the risk of protectionism,” Czech Finance Minister Miroslav Kalousek told reporters ahead of a G7 meeting in Rome at the end of the week.

He also said: “There will not be an agreement on a single methodology of how to deal with toxic assets today.”

Car plan

The Czech Republic, which holds the rotating EU presidency, is seething after French President Nicolas Sarkozy suggested recently that French carmakers should move production home from plants in the Czech Republic.

On Monday, French Economy Minister Christine Lagarde dismissed Prague’s accusations on the same day as Sarkozy announced plans to give more than 6 billion euros ($7.78 billion) of government aid to Renault and PSA Peugeot-Citroen.

The European Commission said on Tuesday the French car plan had raised concerns and it had asked Paris for more details.

“If there were any conditions... which would mean that aid would be subject to conditions that violated the principles of single markets .... then the aid would be deemed to be illegal and the Commission would not tolerate that,” EU Commission spokesman Jonathan Todd said.

Britain’s finance minister Alistair Darling said it was “very important” to avoid protectionism, and his Swedish counterpart Anders Borg said the French car plan would be “problematic for Sweden”.

Both ministers said a focus on banks was vital.

“Getting lending going again is the most important thing we need to focus on in the United Kingdom, Europe and indeed throughout the world,” Darling said.

Swiss bank UBS was the latest European bank to announce further losses. It posted the biggest annual loss in Swiss history, and said it would cut 2,000 more investment banking jobs.

Industry output tumbled across Europe in December, official figures showed, auguring badly for fourth-quarter gross domestic product figures due at the end of the week.

But it was not all bad news. Britain’s goods trade deficit with the rest of the world unexpectedly narrowed to its lowest level in 1-1/2 years in December as imports fell.