Group of Seven finance chiefs vowed to support banks and buoy slowing economic growth as Europe’s debt crisis roiled financial markets and threatened a global recession.
“We will take all necessary actions to ensure the resilience of banking systems and financial markets,” G-7 finance ministers and central bankers said in a statement released during talks in Marseille, France late yesterday. “Concerns over the pace and future of the recovery underscore the need for a concerted effort at a global level in support of strong, sustainable and balanced growth.”
Renewed fears that European policy makers are failing to prevent a Greek default and contain their debt woes yesterday prompted investors to sell stocks and push the euro to a six- month low against the dollar. European bank and sovereign credit risk reached all-time highs as 10-year Treasury and German bund yields fell to record lows on demand for a haven.
Germany moved towards insulating its banks against the fallout of a possible Greek default and Juergen Stark's resignation from the European Central Bank exposed the policy rifts aggravating the debt turmoil. Such shifts highlight the biggest risk to international expansion since the collapse of Lehman Brothers Holdings Inc three years ago this month.
The sense of disarray drew fire from G-7 officials with US Treasury Secretary Timothy F Geithner lobbying his European counterparts to get their act together. Canadian Finance Minister Jim Flaherty even suggested Greece may need to quit the euro.
'Political Will'
European authorities”need to do whatever they can do to calm these pressures," Geithner told Bloomberg Television. "They have to demonstrate they have enough political will."
Dogged by voter unrest and ideological splits, Europe's leaders have reignited investor unease less than two months since they detailed their latest remedy for a crisis nearing its second anniversary. Finland is demanding collateral from Greece in return for fresh aid and German lawmakers want veto power.
Governments are also dithering over a revamp and management of their regional rescue fund and falling short of the closer budget ties investors say are needed to guarantee the euro's future. There are also questions over whether nations can cut deficits without derailing growth and creating even more debt.
'Moment of Truth'
"We need Europe to have its moment of truth, to recognise that the current course isn't sustainable," Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview on Bloomberg TV's”In the Loop" with Betty Liu. "They need to opt for one of two options: either full fiscal union, or a smaller, stronger euro zone."
The G-7 officials conclude their meeting on Saturday with French Finance Minister Francois Baroin briefing reporters at about 2:15 pm.
Central banks will”maintain price stability and continue to support economic recovery" and provide liquidity”as required" to lenders, while governments will pursue”growth- friendly" budget cuts, they said in their statement. The officials renewed their commitment to market-determined exchange rates, while noting excess volatility and disorderly shifts threaten stability. Evidence of another split at the heart of European policy making was highlighted by Stark's unexpected announcement that he will quit the ECB's Executive Board. Stark made the decision after privately protesting the bank's program of purchasing stressed government bonds, which was widened last month to include those of Spain and Italy, a euro-area central bank official said.
ECB Buying
The bond buying, which has totalled 129 billion euros ($177 billion) since it began in May 2010, was the ECB's effort to soothe markets as governments sought longer-term solutions. It opened the Frankfurt-based central bank to criticism even from within its ranks that it blurs the line between monetary and fiscal policy and risks bloating its balance sheet. “It's generally known that I'm not a glowing advocate of these purchases," Stark said August 18.
German Finance Minister Wolfgang Schaeuble said his country will nominate a successor to Stark. Schaeuble's deputy, Joerg Asmussen, will be the candidate, N-TV reported, without saying where it got the information.
Reflecting mounting concern Greece may default and that the debt crisis is morphing into a banking crisis, German Chancellor Angela Merkel's government is preparing plans to shore up its nation's financial sector. The measures involve aiding lenders and insurers that face a possible 50 per cent loss on their Greek bonds if the next tranche of Greece's bailout is withheld, said three coalition officials, who spoke on condition of anonymity because the deliberations are private.
'Plan B'
The existence of a”Plan B" comes as German lawmakers intensify their criticism of Greece, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country's progress.
The European discord antagonised foreign governments. Geithner said that leaders must swallow the short-term political cost of ending the turmoil and that the region's healthiest nations must provide”unequivocal" support for the weakest. “It is completely within the capacity of the stronger members of the euro area to absorb those costs," he said. "Costs would be much, much greater if they were to sit and do nothing."
Greek Commitment
Greece's finance ministry said in a statement it is committed to”full implementation" of its rescue agreement and rejected discussion of a potential default as”organised speculation." Credit-default swaps on Greek debt this week climbed to a record, signaling a more-than 90 per cent chance the nation will fail to meet debt commitments. Greece is relying on a sixth payment of 8 billion euros in international loans that had been scheduled this month. The payment comes under the terms of the May 2010 bailout as EU leaders struggle to put together a second rescue package, which combines a voluntary debt swap and state asset sales.
Europe isn't the only threat to the world economy just two years after its deepest worldwide slump since World War II. Undermining the ability of policy makers to revive expansion is benchmark interest rates are already around record lows and public debts sit at unprecedented highs.
