01/11/2012 11:22 pm ET Updated Mar 13, 2012

Timothy Geithner: Eurozone Needs A 'Firewall' To Prevent Crisis From Spreading

TOKYO, Jan 12 (Reuters) - Europe is making progress in resolving its two-year-old sovereign debt crisis, but creating a "firewall" around the euro zone to prevent the crisis from spreading is a crucial next step, U.S. Treasury Secretary Timothy Geithner said on Thursday.

Geithner, who met his Japanese counterpart Jun Azumi to discuss the world economy and seek cooperation on sanctions on Iranian oil exports, also renewed Washington's call for more flexible G20 currencies, a message mainly for Beijing, which is reluctant to let its yuan strengthen more rapidly.

Geithner arrived in Tokyo after a two-day stop in Beijing where his appeals for support of Iran sanctions met with a cool reception from Chinese officials.

Azumi was more direct in pointing the finger at China while defending Tokyo's own actions to restrain its high-flying yen.

"Currency rates should reflect economic fundamentals. Excess volatility warrants monitoring but I will together with the U.S. ask China to adopt more flexible currency rates in accordance with demand from the international community," he told reporters at a joint news conference with Geithner.

Tokyo says its three currency interventions in 2011 were in keeping with the spirit of international commitments to flexible exchange rates, and tackled excessive, speculative moves.

But in a rare move, the U.S. Treasury criticised Japan in a semi-annual report issued last month for its solo intervention to weaken the yen in August and October, saying it took place when volatility was low and markets appeared to be functioning normally.

Speaking of Europe's efforts to contain its debt crisis, Geithner welcomed the adoption of greater safeguards of financial discipline but said those needed to flanked by funds that would help contain the crisis.

"Europe is making progress in building a stronger fiscal contract and strengthening its financial system. A necessary compliment to that is to build a strong financial firewall."

European Union leaders have agreed to boost the International Monetary Fund's crisis-fighting capacity and accelerate the launch of a permanent rescue fund to mid-2012, but investors fret it may yet again prove too little too late.