G-20 Tells Europe to Deal ‘Decisively’ With Debt Crisis at Oct. 23 Summit

By Gonzalo Vina and Theophilos Argitis - Oct 15, 2011 9:45 PM GMT+0700

Global finance chiefs urged Europe’s leaders to “decisively” deal with the region’s sovereign debt turmoil, setting an Oct. 23 summit as the deadline for a plan.

Europe’s woes, which leave Greece teetering on the edge of default, dominated talks today in Paris of Group of 20 finance ministers and central bankers. Their statement also called for the euro area to quell the threat of contagion by maximising the firepower of their 440 billion-euro ($611 billion) bailout fund.

European officials “will have left Paris under no misunderstanding that there is a huge amount of pressure on them to deliver a solution to the euro-zone crisis,” U.K. Chancellor of the Exchequer George Osborne told reporters. Next weekend’s meeting in Brussels “is the moment people are expecting something quite impressive.”

Optimism that policy makers may resolve a crisis that is rattling financial markets and threatening global growth spurred stocks higher around the world this week, and pushed the euro to its biggest gain against the dollar in more than two years. Europe’s governments are crafting a plan which would include writing down Greek banks by as much as 50 percent and establishing a backstop for banks, people familiar with the discussions said yesterday.

G-20 Statement

“We look forward to further work to maximize the impact of the” European Financial Stability Facility “in order to avoid contagion, and to the outcome of the European Council on Oct. 23 to decisively address the current challenges through a comprehensive plan,” the G-20 statement said.

The G-20 policy makers -- who met to prepare for a Nov. 3-4 gathering of leaders in Cannes, France -- reiterated their aversion to excess volatility and disorderly movements in exchange rates as well as encouraging emerging markets to allow greater currency flexibility. They also committed to ensuring banks are capitalized and financial markets are stable.

Officials split over whether Europe’s travails meant the International Monetary Fund should be handed more cash, beyond agreeing it must have “adequate resources to fulfil its systemic responsibilities.” Emerging markets such as China are considering giving the lender more, while officials from the U.S., Germany and Canada were among those to say either that the euro-area must deliver a fix first or that the IMF already has plentiful and untapped resources.

Greek Crisis

Almost two years to the day since Greece set the crisis in motion by announcing it had underestimated its budget deficit, Europe’s latest strategy hinges on putting it on a viable path. Austerity has plunged it deeper into recession and provoked civil unrest that threatens political stability.

Failure to curb the pain has led to Portugal and Ireland requiring bailouts and markets now targeting larger debt- strapped nations such as Italy. Investors are concerned that if it is allowed to fester the world economy could face a repeat of the chaos that followed the 2008 collapse of Lehman Brothers Holdings Inc.

In the works is a five-point plan foreseeing a solution for Greece, bolstering of the European Financial Stability Facility rescue fund, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty amendments to tighten economic management.

The Greek bond losses now envisaged in the plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people yesterday.

Debt Writedowns

Options include tweaking a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. One variant would take that reduction up to 50 percent, the people said.

Under a more aggressive proposal, investors would exchange Greek bonds for new debt at a lower face value collateralized by the euro area’s AAA-rated rescue fund, the people said. The ultimate option is a restructuring involving writedowns without collateral, they said.

The bank-aid model under discussion is to set up a European-level backstop capitalized by the rescue fund, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities.

Officials are considering seven ways of multiplying the strength of Europe’s temporary rescue fund. The options break down into two broad categories: enabling it to borrow from the European Central Bank or using it to partly insure new bonds issued by distressed governments. The ECB has all but ruled out the first method, making bond insurance more likely, the people said.

Bond Insurance

Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified “interim” period, the people said. EFSF guarantees of the new bonds might range from 20 percent to 30 percent, a person familiar with those deliberations said.

A consensus is also emerging to accelerate the setup of a permanent aid fund planned for July 2013, the European Stability Mechanism. Next week’s discussions will focus on creating it a year earlier, in July 2012, and easing unanimity rules that permit solitary countries to block bailouts.

To contact the reporters on this story: Gonzalo Vina in Paris at gvina@bloomberg.net Theophilos Argitis in Paris at targitis@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net