* Europe aims to leverage bailout fund, unsure how
* U.S., China say act now to avoid catastrophic risk
* Calls for ECB role in crisis; Germany wary
* Greek finance minister says no default, nor euro exit
(Adds background on potential bailout needs)
By Dan Flynn and Jan Strupczewski
WASHINGTON, Sept 24 Europe is working to ramp
up the firepower of its bailout fund, top officials said on
Saturday, as the United States, China and other nations raised
the alarm about its debt crisis hurting the world economy.
Financial markets plunged last week on fears that Greece's
near-bankruptcy could spread to other euro zone countries,
heaping pressure on European policymakers to prevent a repeat
of the chaos that swept the world in 2007-2009.
The European Union's top economic official, Olli Rehn, said
as soon as the region's governments confirm new powers for
their 440-billion-euro fund, known as the EFSF, attention will
turn to how to get more impact from the existing money.
"We need to find a mechanism where we can turn one euro in
the EFSF into five, but there is no decision on how we could do
that yet," another senior European official said on condition
The rescue fund would need to be at least 2 trillion euros
to safeguard Italy and Spain if the crisis were to spread,
financial analysts estimate.
The United States and other nations have urged Europe to
leverage up the fund, possibly with support from the European
But officials from the ECB and from Germany, the region's
paymaster, remained wary of using the central bank, which has a
strict mandate to pursue low inflation.
"We should not think of leveraging a public pot of funds as
a free lunch," said ECB Governing Council member Patrick
Nonetheless, arming the euro zone with a bigger warchest to
lend to governments or shore up banks was the focus of top
finance officials from around the globe who met in Washington
for semiannual meetings of the International Monetary Fund.
The sovereign debt crisis threatens to throw the euro zone
into recession and has placed a troubling drag on an already
slow U.S. economy. It could come to weigh on emerging economies
"Brazil's experience with past crises suggests you have to
confront the problems in a fast, consistent manner," said
Brazilian central bank chief Alexandre Tombini.
"The longer it takes, the higher the cost, the more
contagion spreads. You have to act with overwhelming force."
Take a Look [G7/G8]
IMF Diary [ID:nIMFDIARY]
Highlights of IMF/World Bank meetings [ID:nS1E78M23R]
The IMF's steering committee said in a statement that the
euro zone was committed to whatever was needed to resolve the
single currency bloc's crisis.
It warned that the global economy had "entered a dangerous
phase, calling for exceptional vigilance, coordination and
readiness to take bold action" to cope with Europe's financial
stress and prevent it infecting others.
European officials were scrambling to put in place a
comprehensive crisis-fighting plan by the time leaders from the
Group of 20 nations meet in France in early November.
Greece is at the epicenter of the crisis but it has
threatened to spread to several other euro zone countries.
Italy, the third-biggest economy in the currency bloc, has also
struggled to retain investor confidence, but Italian Economy
Minister Giulio Tremonti said on Saturday its financial house
was "in order."
U.S. Treasury chief Timothy Geithner, in his most explicit
warnings to date, said the ECB should take a more central role
in fighting the crisis. "The threat of cascading default, bank
runs, and catastrophic risk must be taken off the table," he
Investors took some comfort on Friday from signs of new
resolve by European officials, after nearly two years of what
many saw as half-hearted action.
"It is encouraging that ... European officials are
signaling a better appreciation of the depth and potential
consequences of the crisis," Mohamed el-Erian, co-chief
investment officer of bond giant PIMCO, said on Saturday after
further signals that Europe was bolstering its defenses.
"Now they need to translate this into decisive actions
underpinned by a common vision of what they want the euro zone
to look like in five years time."
Some policymakers now talk openly of a possible Greek
default and the need to move much more aggressively to prepare
"Decisions as to how to conclusively address the region's
problems cannot wait until the crisis gets more severe,"
His warning was echoed by China's central bank governor,
Zhou Xiaochuan, who urged quick action to bring greater
financial stability to the Europe.
Canada's central bank governor, Mark Carney, told Canadian
radio that the euro area's bailout fund should be more than
doubled to "the neighborhood of a trillion euros."
BATTENING THE HATCHES
A default by Greece could cause a domino effect in other
highly indebted euro zone countries, putting at risk European
banks which hold their debt.
Greek Finance Minister Evangelos Venizelos said Athens was
determined not to default and would stay in the euro zone.
"Greece will always be in the euro and Greece will never go
bankrupt because this would be destructive for the euro zone
and for many other countries beyond the euro zone," he said.
Athens is in tense talks with the IMF and European
authorities to secure a new 8 billion-euro installment of its
In return, it has pledged deep austerity measures but
negotiators are frustrated at what they say is Greece's slow
reform pace. A loan payment, however, is still expected to be
made in October. The next installment is due in December.
Venizelos was quoted by two newspapers on Friday 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. European banks have agreed to take a 21 percent
loss on their Greek bonds in a restructuring deal.
To battle the crisis, Geithner called for more cooperation
between European policymakers -- who set their own tax and
fiscal policy -- and their central bank.
One option to increase the potency of the EFSF would be for
the ECB to commit large amounts of funding, with the temporary
bailout fund putting forward money to cover potential losses.
German Finance Minister Wolfgang Schaeuble said he was open
to the idea of leveraging Europe's rescue fund but said that
did not necessarily mean the ECB should provide the extra
In another sign of new thinking by Europe, Schaeuble said
Germany backed bringing forward the launch of the euro zone's
permanent rescue mechanism, which is currently scheduled for
mid-2013. The new mechanism would give policymakers powers to
impose losses on private bondholders in a default and could be
leveraged more easily than the temporary version of the fund.
Germany, as the strongest economy in Europe, needs to play
a central role in any effort to curb a debt crisis, but public
opinion there has turned against further big bailouts for
fellow euro zone countries.
Schaeuble stuck to Germany's insistence that austerity was
the cure for the crisis. "You can't cure an alcoholic by giving
him alcohol ... The main reason for the lack of demand is the
lack of confidence," he said.
(Additional reporting by IMF reporting team in Washington,
Jennifer Ablan in New York, and Sakari Suoninen in Frankfurt;
Writing by Glenn Somerville and William Schomberg; Editing by
Chizu Nomiyama and Tim Ahmann)