The world's leading economies pressed European leaders to act decisively to resolve the euro zone's sovereign debt crisis by the next EU summit on Sunday, warning the bloc's indecision was endangering the world economy.
In unusually direct language, finance ministers and central bankers of the Group of 20 major economies said on Saturday (15 October) they expected a European Union summit on 23 October to "decisively address the current challenges through a comprehensive plan".
French Finance Minister Francois Baroin, who chaired the meeting, said Berlin and Paris, the leading euro zone powers, were well on the way to agreeing a plan to reduce Greece's debt, stop contagion and protect Europe's banks.
Non-euro countries highlighted the damage the European crisis was already doing to their economies and underlined the urgent need for action by the 17-nation single currency area.
US Treasury Secretary Timothy Geithner told reporters he was encouraged that the latest EU moves towards an overall strategy to tackle the two-year-old crisis contained the right elements, notably a recapitalisation of European banks.
"They clearly have more work to do on the strategy and the details, but when France and Germany agree on a plan together and decide to act, big things are possible," Geithner said, adding: "I am encouraged by the speed and direction in which they are moving."
Leveraging the EFSF
The summit communique urged the euro zone "to maximise the impact of the EFSF [bailout fund] in order to address contagion". EU officials said the most likely option was to use the €440 billion fund to offer partial loss insurance to buyers of stressed member states' bonds in a bid to stabilise the market.
Ideas to ramp up the euro zone's rescue fund are now centering on making the fund more like an insurer so that it covers, for example, the first 20% of losses a bank could suffer on government bonds, thereby multiplying its firepower fivefold.
Emerging economies, who have been buffeted in the wake of Europe's predicament, suggested pouring more resources into the International Monetary Fund to protect those in trouble.
"We heard loud and clear that the emerging markets in particular were very concerned about the risk of contagion from advanced economies," IMF chief Christine Lagarde told a news conference, promising to help "non-consenting victims of the economic crisis".
But the suggestion ran into resistance from the United States and others, burying the idea for now and putting the onus firmly back on Europe.
France, Germany hold the key
The euro zone's two leading powers, Germany and France, 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.
For once in the long-running crisis, the timetable is ambitious. But analysts see risks that forcing banks, the main source of business investment in Europe, to raise more capital could doom the region's faltering growth, and that the reduction in Greek debt may be too small to avoid a default.
There were growing signs that Athens' creditor banks will fight any attempt to make them shoulder a bigger burden in restructuring Greece's debts. The lead negotiator of the banking lobby representing private bondholders said there were no grounds to impose bigger "voluntary" losses on their debt than the 21% agreed in July, which looks insufficient.
The G20 statement pledged to ensure banks are adequately capitalised and have sufficient access to funding, and said central banks would continue to provide liquidity to banks as required.
Fears of a Greek default have undermined confidence on volatile markets since late July, with global stocks falling 17% from their 2011 high in May.
But they have picked up since the leaders of France and Germany set an end-October deadline for comprehensive action.
Trichet calls for EU treaty change
Meanwhile, European Central Bank President Jean-Claude Trichet joined calls to change the European Union's treaty in order to strengthen the euro zone's governance and prevent further crises in the future.
"In my view it is necessary to change the treaty to prevent one member state from straying and creating problems for all the others," Trichet told Europe 1 radio on Sunday.
But he added that he expected existing governance rules would be applied much more rigorously in the future, even without a change in the treaty.
"We don't have a federal budget, we don't have a political federation so we have to fully respect the constraints and the mutual supervision rules that exist in the euro zone," he said.