WASHINGTON/FRANKFURT (Reuters) ? Seven world leaders on Thursday demanded Europe act more decisively to quell its debt crisis and a European Central Bank study warned that the entire euro currency project was now in peril.
As the world's top finance chiefs gathered for talks in Washington, an open letter by the leaders of Australia, Canada, Indonesia, Britain, Mexico, South Africa and South Korea stressed the risk 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 leaders wrote in the letter to France, currently chair of the Group of 20 leading economies.
As stock prices around the world fell on fears of a new economic slump, U.S. Treasury Secretary Timothy Geithner stepped up his warnings to Europe to act quickly to stem the crisis and 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."
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 issue a communique to outline a response.
That may be disappoint investors already alarmed about the inability of policymakers to come together to tackle the world's economic problems as they did to fight the financial crisis of 2007-09.
World stocks plunged on Thursday as investors fretted over the grim global growth outlook including data pointing to a slowdown in China, one of the world's key economic engines.
European stocks fell around 4.5 percent and the Dow Jones Industrials were down nearly 4 percent.
Investors flooded into the safe haven of U.S. Treasury debt pushing yields to new lows a day after the Federal Reserve announced a plan to shift its balance sheet to longer-dated paper to keep lending rates low and bolster the U.S. economy.
The European Union's monetary affairs commissioner, Olli Rehn, vowed that European leaders would not allow an uncontrolled Greek default, nor would the country leave the euro zone.
Rehn did not rule out the possibility of a Greek debt restructuring, but said this would be difficult to do in an "orderly" way.
In Athens, Prime Minister George Papandreou said further austerity measures were vital to Greece, even as workers striking in protest shut down the country's transport system.
"There is no other path. The other path is bankruptcy, which would have heavy consequences for every household," he said after a meeting in parliament with deputies from his ruling Socialist party.
ECB WARNS EURO IN DANGER
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.
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.
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.
Canadian Finance Minister Jim Flaherty also joined the chorus of non-European officials warning that a new global credit crunch could bite if Europe failed to act quickly.
Flaherty told the Canadian Broadcasting Corp that 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.
BANKS IN FOCUS
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.
French finance Minister Francois Baroin told reporters in Washington that any liquidity problems for euro zone banks were addressed by global central bank efforts to set up new liquidity facilities last week.
He said the euro zone's top priority is "reducing deficits as quickly as possible." Leveraging Europe's bailout fund could be achieved at a later date to "give it more systemic firepower."
(Additional reporting by David Ljunggren in Ottawa, Regan Doherty in Qatar, Daniel Flynn Jan Strupczewski, Rachelle Younglai and Lesley Wroughton in Washington, Lionel Laurent and Julien Ponthus in Paris, Ross Finley in London, Lefteris Papadimas in Athens, Martin Santa in Frankfurt; Writing by Paul Taylor and David Lawder; Editing by Andrea Ricci)
Source: http://us.rd.yahoo.com/dailynews/rss/business/*http%3A//news.yahoo.com/s/nm/20110922/bs_nm/us_g20
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