Warnings mount on euro crisis, BRICS mull more aid

WASHINGTON Thu Sep 22, 2011 7:37pm EDT

A bank employee spreads out euro notes at a bank branch in Madrid January 13, 2011. REUTERS/Andrea Comas

A bank employee spreads out euro notes at a bank branch in Madrid January 13, 2011.

Credit: Reuters/Andrea Comas

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WASHINGTON (Reuters) - World leaders and finance chiefs on Thursday pushed Europe to quell its debt crisis and big emerging economies said they might provide more money to help stop the chaos from spreading.

As finance ministers and central bankers gathered for talks amid growing concern about sharply slowing growth and plunging stock markets, the leaders of seven big economies stressed the need to contain the euro zone crisis.

"Euro zone governments and institutions must act swiftly to resolve the euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy," the leaders of Australia, Canada, Indonesia, Britain, Mexico, South Africa and South Korea wrote in an open letter to France, chair of the Group of 20 leading economies.

Separately, officials from the so-called BRICS countries, including heavyweights China, Brazil and India, said they would consider giving more funds to the International Monetary Fund to boost global stability.

But India issued a reminder that developing countries were not in a position to bail out richer economies.

"We represent a group of countries where there is (an) enormous amount of demand for resources at home for poverty reduction," Reserve Bank of India Governor Duvvuri Subbarao said at a joint BRICS news conference in Washington.

The euro area crisis, centered on a fiscal meltdown in Greece, has put a strain on the IMF's resources. With key economies teetering on the edge of recession, more countries could seek emergency loans, quickly depleting its capital.

An internal IMF staff report obtained by Reuters last week showed that the fund could comfortably lend out another $390 billion without endangering its balance sheet. But in a worst-case scenario, it may face demands for $840 billion -- an increase of $200 billion from staff estimates made in June.

China's central bank chief Zhou Xiaochuan said any talks about giving the IMF more funds should include other countries beyond the BRICS such as the Group of Seven rich nations.

Highlighting the growing role of the BRICS in the world, Zhou said major emerging markets should boost domestic demand to take up some of the slack caused by weakness in the United States and Europe.

"In today's crisis period, internal demand of each economy is important, and we should find a way to enlarge internal demand in our economy," he said.

But Zhou made no mention of repeated U.S. calls for Beijing to let its yuan currency rise faster.

As stock prices around the world fell on fears of a new economic slump, U.S. Treasury Secretary Timothy Geithner voiced optimism that Europe would devote more of its own resources to backstop euro area governments and banks under stress.

"I am very confident they're going to move in the direction of expanding (their) effective financial capacity," he said. "They're just trying to figure out how to get there in a way that is politically attractive."

Europeans showed little sign of bowing to the pressure. French Finance Minister Francois Baroin said giving more clout to Europe's new bailout mechanism, the European Financial Stability Fund, could be done but was not top of his agenda.

"The main issue (for the euro zone) is reducing (budget) deficits as quickly as possible. Leveraging the EFSF is not a priority for now, (but) we could eventually consider how to leverage it to give it more systemic firepower."

ECB WARNS EURO IN DANGER

In Frankfurt, a European Central Bank study warned the entire euro currency project was now in peril.

The study, perhaps the most stern warning about the euro's future from a central banker, was a parting shot from ECB chief economist Juergen Stark, who resigned this month after opposing the bank's purchases of troubled countries' bonds.

"Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of (Europe's Economic and Monetary Union) itself," said the research paper, which was published by the ECB but not endorsed by it.

G20 finance ministers will meet for dinner in Washington on Thursday to discuss the crisis, but they have no plans to issue a communique to outline a response.

Financial markets were disappointed that a coordinated game plan to arrest Europe's woes was not at hand. World stocks plunged as investors worried about the grim global growth outlook, including data pointing to a slowdown in China, one of the world's key economic engines.

European stocks fell more than 4.5 percent and, in the United States, the Dow Jones industrial average closed down about 3.5 percent.

Investors flooded into the safehaven of U.S. Treasury debt, pushing yields to new lows a day after the Federal Reserve, warning the U.S. economy faced significant risks, announced a new plan to to keep borrowing costs low.

"We're not quite staring down the barrel (but) the problems in the euro zone are now so big that they have begun to threaten the stability of the world economy," Canadian Prime Minister Stephen Harper told his nation's parliament.

The European Union's monetary affairs commissioner, Olli Rehn, did not rule out the possibility of a Greek debt restructuring but vowed European leaders would not allow an uncontrolled default nor Greece leaving the euro zone.

In Athens, Prime Minister George Papandreou said further austerity measures were vital to Greece, even as workers striking in protest shut down the country's transport system.

"There is no other path. The other path is bankruptcy, which would have heavy consequences for every household," he said.

BANKS IN FOCUS

The crisis has raised pressure on European banks, particularly in France, which are heavily exposed to Greece and other troubled euro zone sovereigns. Baroin said any liquidity problems for Europe's banks were addressed by a move by global central banks to set up new liquidity facilities last week.

The IMF has pressed for a recapitalization of European banks but has faced opposition from bank executives and EU governments who have said balance sheets are sound.

Europe's banking regulator denied a Financial Times report that it would force 16 weaker, mid-tier banks to raise capital more quickly after they came close to failing European stress tests earlier this year.

France's biggest bank BNP Paribas denied a Reuters report that it was in talks with the Gulf state of Qatar on taking a stake in the bank.

(Additional reporting by David Ljunggren in Ottawa, Regan Doherty in Qatar, Daniel Flynn, Jan Strupczewski, Rachelle Younglai and Lesley Wroughton in Washington, Lionel Laurent and Julien Ponthus in Paris, Ross Finley in London, Lefteris Papadimas in Athens, Martin Santa in Frankfurt; Writing by David Lawder; Editing by Neil Stempleman and Chizu Nomiyama)

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Comments (8)
So, after a tepid return to Keynesianism in 2008 and 2009 yielded modest success in saving capitalism from itself, it was deemed prudent to institute fiscally conservative practices out of the 19th Century in 2010 and 2011, with the predicted result that the current collapse of practically everything now makes the initial crisis looks like a bygone era we can look back on with nostalgia. A quote (at http://www.skidelskyr.com/site/article/for-a-new-world-new-economics/) from “23 Things They Don’t Tell You About Capitalism” by Ha-Joon Chang, grabs the bull by the tail and faces up to the fact that “the free-market era inaugurated by Ronald Reagan and Margaret Thatcher delivered worse outcomes, for developed and developing countries alike, than the more statist capitalism which preceded it.”

Sep 22, 2011 11:51am EDT  --  Report as abuse
FBreughel1 wrote:
Sure, Keynes is really brilliant. Allowing politicians to spend money they don’t have. It got us into this mess in the first place. Every taxpayer knows it is crap and that the bill comes.

A couple of months until 2012 and Europe is budget neutral.
And you know who is going to in the spotlights then ?

Sep 22, 2011 1:30pm EDT  --  Report as abuse
Lambick wrote:
It seems that an immense panic envelopes the world when the economy does not grow at a breakneck rate. It certainly is an appalling thing to see youth unemployment rates of 40-50% and the spectre of social unrest that lurks in the shadows is even less comforting. Wouldn’t it, however, be sensible to assume that we aren’t going to have much growth for some time to come? Assuming that the West is in for a long-time Japanese-style retrenchment, I think that energy is better spent in ensuring fair distribution instead of piling more failed monetary and fiscal measures on an economy that looks surprisingly like a dead sheep.

Sep 22, 2011 2:07pm EDT  --  Report as abuse
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