Europe hastens to build up debt crisis defenses

Europe hastens to build up debt crisis defenses

ReutersBy Lesley Wroughton and Dina Kyriakidou | Reuters – 1 hr 57 mins ago

WASHINGTON (Reuters) - European policymakers are quickening their preparations to cope with an escalation of the region's debt crisis as talk of a possible Greek default gained pace on Friday.

Finance chiefs from around the world have turned up the heat on Europe to do more to prevent Greece's debt crisis from infecting other euro zone countries and the world economy.

Concern now appeared to be turning toward safeguarding the banking system more than rescuing Greece, as international lenders were increasingly losing patience with Athens consistently missing fiscal and reform targets.

"They have six weeks to resolve this crisis," said British finance minister George Osborne, speaking on the sidelines of semi-annual policy discussions in Washington.

Euro zone leaders need to have the situation under control by the time leaders of the Group of 20 economies meet in France in November, he said.

World stock markets, which had plunged to a 14-month low on fears about the scale of the euro zone crisis, steadied after European Central Bank officials said they would use more firepower to help the banking system through the crisis.

Pressure is growing on European governments for a recapitalization of the region's banks to strengthen them in the event of a Greek default.

At the same time, European policy-makers seemed to be warming to the idea of giving more muscle to their bailout fund which would be tested in the event of a Greek debt default.

Finance Minister Evangelos Venizelos was quoted by two newspapers as saying an orderly default with a 50 percent haircut for bondholders was one way to resolve the heavily indebted euro zone nation's cash crunch.

Greece is in tense talks with the International Monetary Fund and European authorities, known as the troika, to secure a new 8 billion-euro installment of its rescue package to avoid bankruptcy in October in return for austerity measures.

The Greek finance minister is due to meet the head of the IMF on Sunday.

Negotiators have expressed frustration at what they say is Greece's slow pace. "The troika officials said they were going over again measures they had agreed to months before. They said they had a sense of deja vu," a source close to the inspectors said on condition of anonymity.

After October's loan payment, which is widely expected to be made, the next installment is due in December.

European Central Bank President Jean-Claude Trichet urged authorities to take decisive action, saying risks to the financial system had "increased considerably."

Lawrence Summers, former U.S. Treasury secretary, gave a somber of assessment of the dangers facing the world economy, including the U.S. economy slowing to almost a standstill.

"This is the 20th annual meeting (of the IMF and World Bank) I've been privileged to attend. There has not been a prior meeting at which matters have had more gravity and at which I have been more concerned about the future of the global economy," Summers told a discussion panel.

PUZZLE PIECES

As European policymakers looked to piece together a bolder crisis-fighting strategy, investors took some relief as three officials said the ECB could revive its one-year liquidity lines to shore up banks.

"I think it might be advisable to think about reintroducing this approach," ECB governing council member Ewald Nowotny said.

The IMF, which has been pressing aggressively for a recapitalization of Europe's banks, reckons the debt crisis has increased their risk exposure by 300 billion euros.

In a sign Europe was coming to terms with the idea of a recapitalization, France's top market regulator said 15 to 20 banks needed extra capital, although no French ones "at this stage.

The growing talk of a Greek default met with stiff opposition from Germany's Chancellor Angela Merkel. She told a meeting of her political party members that was not an option for her because it might trigger a domino effect in other struggling economies. "The damage would be impossible to predict," Merkel warned.

Politicians in northern Europe, especially in Germany, have opposed dedicating more money to fight a crisis that they see as caused by the profligacy of countries such as Greece.

ECB governing council member Klaas Knot told a Dutch daily a Greek default could no longer be ruled out, the first ECB policymaker to speak openly of the prospect.

That warning was echoed by the IMF's top official in Europe, Antonio Borges: "If the Greeks do what they have to do there will be no default. But on the other hand if they hesitate, procrastinate, find it impossible etc., then it is very hard to avoid it."

MARKET HOPES

G20 finance ministers and central bankers had pledged on Thursday to "take all necessary actions to preserve the stability of the banking system and financial markets as required," a statement that failed to placate investors.

The G20 statement, issued after talks in Washington, said the 17-nation euro zone would implement actions to "maximize" the impact of the region's bailout fund by mid-October.

G20 participants did not say how the 440 billion-euro European Financial Stability Facility might be altered although French Finance Minister Francois Baroin used the word "leverage" in comments to reporters.

The United States has called on Europe to leverage up the EFSF to give it more firepower.

(Additional reporting by IMF reporting team in Washington, Sakari Suoninen in Frankfurt, Natsuko Waki and Ana Nicolai da Costa in London, Lefteris Papadimas and Ingrid Melander in Athens; Writing by William Schomberg, Glenn Somerville and Paul Taylor; Editing by Chizu Nomiyama)


[You must be registered and logged in to see this link.]