Northern, WI 9/23/2011 (PennyPayDay) – European policymakers showed signs they were preparing new steps to cope with the region's debt crisis even as talk of a possible Greek default gained pace on Friday.World stock markets, which had plunged to a 14-month low on fears the euro zone crisis was not under control, rallied after European Central Bank officials said they would use their firepower to help the banking system through the crisis.
Finance ministers and central bankers from around the world, in Washington for semi-annual policy discussions, have turned up the heat on Europe to do more to prevent Greece's debt crisis from infecting the world economy.
"They have six weeks to resolve this crisis," said British finance minister George Osborne. Euro zone leaders needed to have the situation under control by the time leaders of the Group of 20 economies meet in France in November, he said.
Pressure is growing on European governments for a recapitalization of the region's vulnerable banks -- perhaps to strengthen them in preparation for a Greek default.
Policymakers in Europe also seemed to be warming to the idea of giving more firepower to their bailout fund.
"Europe is running against time," Brazilian Financial Minister Guido Mantega said. "I hope Europe does not wait for the first countries to break before putting new instruments in place because then the bill will be higher."
The head of the International Monetary Fund, Christine Lagarde, said Europe and the grim economic outlook in the United States required a new collective effort or "we run the risk of losing the battle for growth."
PUZZLE PIECES
As European policymakers try to piece together a bolder strategy for stemming the debt crisis, the ECB provided some relief to investors, as three officials said banks could be primed with one-year liquidity to help shore them up.
"During the time of the (2007-2009) financial crisis, one of the instruments we had was ... one-year tenders. I think it might be advisable to think about reintroducing this approach," ECB board member Ewald Nowotny said.
The IMF, which has been pressing aggressively for a recapitalization of Europe's banks, reckons the debt crisis has increased their risk exposure by 300 billion euros.
In a sign Europe was coming to terms with the idea of a recapitalization, France's top market regulator said 15 to 20 banks needed extra capital, although no French ones "at this stage.
The prospect of a Greek default appeared to grow when Finance Minister Evangelos Venizelos was quoted by two newspapers as saying an orderly default with a 50 percent haircut for bondholders was one way the heavily indebted euro zone nation's cash crunch could be resolved.
Officials played down the reports and Venizelos described them in a statement as an unhelpful distraction from the central task of sticking to Greece's EU/IMF bailout program.
ECB governing council member Klaas Knot told a Dutch daily a Greek default could no longer be ruled out, the first ECB policymaker to speak openly of the prospect.
"It is one of the scenarios," Dutch daily Het Financieele Dagblad quoted him as saying. "All efforts are aimed at preventing this, but I am now less certain in excluding a bankruptcy than I was a few months ago."
MARKET HOPES
Hopes the ECB would take further steps to ease the debt crisis helped European shares stage a late rally, although U.S. stocks were mixed in afternoon trade.
Late on Thursday, G20 finance ministers and central bankers said they would "take all necessary actions to preserve the stability of the banking system and financial markets as required," a statement that failed to placate investors.
The G2O statement, issued after talks in Washington, said the 17-nation euro zone would implement actions to "maximize" the impact of the region's bailout fund by mid-October.
G20 participants did not say how the 440 billion-euro European Financial Stability Facility might be altered although French Finance Minister Francois Baroin used the word "leverage' in comments to reporters.
The United States has previously proposed that Europe could leverage up the EFSF to give it more firepower to protect the euro zone and its banks.
The IMF's Lagarde said it might be wise for the ECB to continue buying government bonds even after Europe's bailout fund is given the power to do so.
Politicians in northern Europe, especially in Germany, have opposed dedicating more money to offset what they see as the profligacy of countries such as Greece. Tensions have also flared within the ECB over its role in buying bonds of struggling euro zone states.
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