The BRICS nations of Brazil, Russia, India, China and South Africa are meeting next week in Washington to coordinate a proposal to offer assistance to the European Union in overcoming its fiscal difficulties, according to Brazilian government officials.
China and the United States urged Europe's leaders to prevent the euro area debt mess from spreading, underlining international alarm over a crisis that is now threatening Italy, the zone's third-biggest economy.
President Barack Obama urged "more effective coordinated fiscal policy" by the euro area states. Chinese Premier Wen Jiabao said Beijing was willing to help its biggest trading partner, but added that Europe must stop the crisis from growing.
Investors are increasingly skeptical the debt debacle in the 17-nation currency area can be resolved. Credit markets are factoring in a 90% chance that Greece will default on its debts and they demanded the highest risk premium on Italian five-year bonds at auction on Tuesday since the country joined the euro in 1999.
"What we have to take note of now is to prevent the sovereign debt crises from spreading and expanding further," Wen said.
Trying to contain the crisis, Italy is expected to approve a 54-billion-euro austerity package today, although news of the measures has so far done little to reverse investor alarm over whether the country can manage its debts.
Greek Prime Minister George Papandreou will hold a conference today with French President Nicolas Sarkozy and German Chancellor Angela Merkel.
A combination of a banking crisis akin to the global credit crunch, a Greek default and a financial meltdown in Italy could tear the euro zone apart.
"I think there is a possibility, if the wrong steps are taken, that the system goes off the rails," Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro's survival was at risk.
Merkel yesterday (13 September) sought to quash talk of an imminent Greek default or its exit from the euro zone. Confused statements from Germany and France over whether they would issue a joint statement on Greece sent markets gyrating up and then down.
Greece has said it would run out of cash in a few weeks and needs an eight-billion-euro tranche in October to pay wages and pensions.
Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.
Wen didn't specify what steps China, with more than $3 trillion in foreign exchange reserves, might take to help Europe.
But a senior Brazilian source told Reuters yesterday that the BRICS group were in early talks on increasing their holdings of euro-denominated debt to help ease the crisis.
"We've said countless times that China is willing to give a helping hand and we'll continue to invest there," Wen said in a speech at a World Economic Forum event in China.
He suggested though that the EU would have to reciprocate Beijing's help by moving to grant China "market economy" status, which would lower its exposure in trade to anti-dumping cases.
Obama told Spanish journalists in a group interview published on Tuesday that eurozone leaders needed to show markets they were taking responsibility for the debt crisis. Weakness in the global economy would persist so long as it is not resolved, he said.
In a measure of Washington's concern, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday.
It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend.
Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy.
"In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective coordinated fiscal policy," the news agency EFE quoted him as saying.
Geithner is likely to urge eurozone finance ministers on Friday to speed up ratification of changes to their bailout fund, but a US official said he would not push for an increase in the fund's size.
EURACTIV with Reuters
Since the euro zone's debt crisis erupted last year, the region's governments have aimed to limit it to Greece, Ireland and Portugal, which have so far signed up to bailouts totalling almost €400 billion.
Spain and Italy had managed to keep their access to market funding under control through fiscal reforms.
But in recent weeks the situation has worsened. Due to the large size of the Spanish and Italian economies, pressure on the euro zone would increase dramatically if either country were to need financial assistance.
EU officials have avoided any talk of budget offenders like Greece being kicked out of the euro zone but the Netherlands put the unwanted question firmly back on the table on 8 September, with proposals to appoint a new "commissioner for budgetary discipline".
The European Commission strongly rejected the idea, saying neither exit or expulsion from the euro area is possible according to the Lisbon Treaty.
EU official documents
- Financial Times:That Brics rescue plan in full
- EURACTIV Slovakia:Rozvojové krajiny chcú pomôc? zachráni? euro
- Wall Street Journal:Brazil Govt Official: BRICS Coordinating Plan To Aid EU