09/22/2011 11:18 am ET Updated Nov 22, 2011

Euro Zone 'Must Act Swiftly' To Stave Off Euro Crisis, Leaders Say

FRANKFURT/OTTAWA (Reuters) - Seven world leaders on Thursday demanded Europe act more decisively to quell its debt crisis as a European Central Bank study warned that the entire euro currency project was now in peril.

As top finance officials gathered in Washington for meetings of the Group of 20 and International Monetary Fund, an open letter to G20 president France from the leaders of Australia, Canada, Indonesia, Britain, Mexico, South Africa and South Korea stressed the threat of the euro zone crisis spreading worldwide.

"Euro zone governments and institutions must act swiftly to resolve the euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy," the seven leaders wrote.

"The euro zone must look at all possible options to ensure long-term stability in the world's second largest international currency."

U.S. Treasury Secretary Timothy Geithner also stepped up his warnings to Europe, saying that stemming the crisis was more important than efforts to boost European growth, and that it was essential to provide enough resources to prevent a Greek default. But he expressed faith Europe would act.

"They recognize that if you let, as the United States did in the early part of 2008, the momentum of these concerns build, they're very hard to arrest, much more expensive to arrest," Geithner told a forum in Washington. "So you're going to see them act with more force in the coming weeks and months."

World stocks fell sharply on Thursday as investors fretted over the grim global growth outlook, with European stock indexes off about four percent and U.S. indexes down more than two percent in early trade.

Finance ministers from the G20 leading developed and emerging economies will meet for dinner in Washington on Thursday to discuss the crisis, but they have no plans to issues a communique to outline a response.


The ECB study was a parting shot from ECB chief economist Juergen Stark, who resigned this month after opposing the bank's policy of buying troubled countries' bonds. It was perhaps the most strongly-worded warning about the future of the euro from a central banker.

"Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of (Europe's Economic and Monetary Union) itself," said the research paper, which was published by the ECB but not endorsed by it.

The study co-authored by Stark recommended euro zone countries face tough new debt rules, have their deficits approved at a European level and if they reneged, face automatic fines.

More urgent is the need to bolster Europe's banks and enable new powers for the euro zone's bailout fund given many economists expect Greece to eventually default.

The European Union's new super-watchdog, the European Systemic Risk Board, warned that the knock-on effects of the debt crisis that began in Greece in 2009 had led to considerably higher risks of financial instability in Europe.

"The high inter-connectedness in the EU financial system has led to a rapidly rising risk of significant contagion. This threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond.

The board, chaired by ECB President Jean-Claude Trichet, called for "decisive and swift action" from policymakers, widely seen as being slow in the fight to contain the crisis.

It said supervisors "should coordinate efforts to strengthen bank capital, including having recourse to backstop facilities, taking also into account the need for transparent and consistent valuation of sovereign exposures."

The IMF has pressed for a recapitalization of European banks -- and has faced some opposition from bank executives and EU governments who have argued balance sheets in the region are sound.

Speaking on the eve of IMF and G20 meetings, Canadian Finance Minister Jim Flaherty joined a chorus of non-European officials warning that a new global credit crunch could bite unless Europe tackles Greece's debt problems, the most acute in the 17-nation currency area.

"The number one thing we'll talk about that Europe has to pick a lane here, they've got to deal with that issue respecting Greece," he told the Canadian Broadcasting Corp.

"Otherwise the markets will get ahead, we will have some sort of a crisis, it will become a banking crisis, it will affect banks all around the world, we could be into another credit crisis which will cause contraction in the real economy. So we've got to deal with that," he said.

Flaherty said European nations could "get ahead of the game" if they were prepared to increase the euro zone's bailout funds to 1 trillion euros from 440 billion euros.


The crisis has raised pressure on European banks, and particularly French lenders, which are heavily exposed to Greece and other troubled euro zone sovereigns.

France's biggest bank, BNP Paribas denied a Reuters report that it was in talks with the Gulf state of Qatar on taking a stake in the bank.

Concerns over French banks' risk exposure has wiped tens of billions of euros off their market value in recent weeks and restricted their access to wholesale funding, particularly from U.S. funds.

A Qatar-based source close to the situation told Reuters late on Wednesday: "They (Qatar) have been talking to banks across France, given the tremendous need for capital."

Shares in BNP fell a further 3.0 percent and the other two big French lenders, Societe Generale and Credit Agricole, were both down more than 7 percent at 1430 GMT.

(Additional reporting by Regan Doherty in Qatar, Lionel Laurent and Julien Ponthus in Paris, Ross Finley in London, Lefteris Papadimas in Athens, Martin Santa in Frankfurt; Writing by Paul Taylor; Editing by Andrea Ricci)

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