The world's leading economies kept the pressure firmly on Europe to sort out its debt crisis on Saturday with the sense of urgency to be reflected in a communique at the end of a G20 finance chiefs' meeting.
The make or break moment in the two-year-old crisis that has spread far beyond starting point Greece could come at a summit of EU leaders on Oct. 23. Germany and France have promised to set out a plan to stop infection, protect Europe’s banks and the wider world economy.
The draft communique, which must still be signed off by G20 finance ministers and central bankers "looks forward to further work to maximize the impact of the EFSF (bailout fund) in order to address contagion and to the outcome of the European Council on October 23" — unusually direct language for G20 diplomats.
Euro zone policymakers are trying to put flesh on the bones of a crisis resolution plan in time for the EU summit. It will involve plans to recapitalise banks, make Greek’s debt mountain more sustainable and ramp up the firepower of the bloc’s rescue fund.
The draft communique said the G20 would "ensure that banks are adequately capitalized and have sufficient access to funding. Central banks have recently taken decisive actions to this end and will continue to stand ready to provide liquidity to banks as required".
Efforts by some countries to increase the IMF’s ammunition to fight the crisis ran into resistance from the United States and others on Friday, burying the idea for now and putting the onus firmly back on Europe.
One G20 source said emerging market policymakers backed injecting some $350 billion into the International Monetary Fund. The IMF’s dominant shareholders, including the United States, Japan, Germany and China, are content that the fund’s $380 billion worth of resources is enough.
"They (the IMF) have very substantial resources that are uncommitted," U.S. Treasury Secretary Timothy Geithner said.
German Finance Minister Wolfgang Schaeuble agreed the euro zone debt crisis was for Europe to solve, and expressed confidence that EU leaders would produce a plan at the Oct. 23 summit that would be convincing for financial markets.
The United States is among countries keen to keep pressure on the Europeans to act more decisively to end the crisis that began in Greece but has since spread to Ireland and Portugal and is lapping at Spain and Italy.
"The first priority here is for Europeans to put their own house in order," Australian finance minister Wayne Swan said, though his office in Canberra later released a transcript of a CNN interview in which he added that the G20 should be willing to support extra IMF resourcing if required.
Canadian Finance Minister Jim Flaherty also said the G20 should keep up pressure on the euro zone on its "arduous" journey towards a solution and not focus on IMF resources.
If minds needed concentrating further, Standard and Poor’s cut Spain’s long-term credit rating on Friday, citing the country’s high unemployment, tightening credit and high private sector debt, highlighting the risk of a much larger economy than Greece coming under threat.
Fears about the damage a default by Greece — and possibly others — could inflict on the financial system have driven a confidence-sapping bout of market volatility since late July, with global stocks falling 17 percent from their 2011 high in May. But they have picked up since the leaders of France and Germany set themselves an end-October deadline for action.
Unlike in 2009 when the G20, which makes up 85 percent of global output, launched coordinated stimulus to pull the world out of crisis, the rest of the world is chafing at Europe’s slow response while Washington and Beijing are sparring over the yuan currency.
The Franco-German crisis plan is likely to ask banks to accept bigger losses on their Greek debt than the 21 percent spelled out in a July plan for a second bailout of Athens, which now looks insufficient.
Yet to be decided is whether that can be achieved with the voluntary participation of the banks.
It should also lay out a system for recapitalising banks and plans to leverage the euro zone’s 440 billion euros European Financial Stability Facility to give it more punch.
Schaeuble said European banks should be helped, if necessary, with state means to strengthen their capital.
Whilst the EFSF has the resources to cope with bailouts for Greece, Portugal and Ireland, it would be overwhelmed by the need to rescue a bigger economy such as Italy or Spain.
The most effective method would be to turn the EFSF into a bank so it could draw on European Central Bank resources. Both Germany and the ECB are opposed to that so attention has turned to the idea of making the fund more like an insurer.
For example, if the EFSF covered the first 20 percent of losses a bank could suffer in case of a default — it could multiply its firepower fivefold to over 2 trillion euros.
NO CHANGE ON YUAN, FOREX LANGUAGE
A G20 delegation source said the final communique would contain language on exchange rates that is no harsher than at their last meeting in Washington.
The source also said China had given no indication it was prepared to change pace on greater flexibility of its yuan currency.
Any real progress on bigger goals such as setting parameters to measure global imbalances and reining in speculative capital flows is unlikely to come before a Nov. 3-4 summit in Cannes, where France passes the G20 baton to Mexico.
A French finance ministry source said that for Cannes, France hoped to have two or three measures agreed for countries showing imbalances: consolidation measures for those with high deficits and stimulus measures for those with surpluses.
A separate G20 source said after preparatory talks late on Thursday that China would commit to boost its consumption through a five-year plan, via households and companies as well as infrastructure.
A communique and round of closing news conferences are expected around 1500 GMT with other decisions set up for a G20 leaders’ summit in Cannes on Nov. 3/4.