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China, U.S. raise alarm over euro debt crisis

Sep 13, 2011, 10:16 p.m.
General view of the logo outside a branch of French bank Societe Generale in Paris September 13, 2011. REUTERS/Charles Platiau

By Don Durfee and Noah Barkin

BEIJING/BERLIN (Reuters) - China and the United States urged Europe's leaders to prevent the euro area debt mess from spreading, underlining the international alarm over a crisis now threatening Italy, the zone's third-biggest economy.

President Barack Obama urged "more effective coordinated fiscal policy" by the euro area states. Chinese Premier Wen Jiabao said Beijing was willing to help its biggest trading partner, but added that Europe must stop the crisis from growing.

Investors are increasingly skeptical the debt debacle in the 17-nation currency area can be resolved. Credit markets are factoring in a 90 percent chance Greece will default on its debts and they demanded the highest risk premium on Italian five-year bonds at auction on Tuesday since the country joined the euro in 1999.

"What we have to take note of now is to prevent the sovereign debt crises from spreading and expanding further," Wen said on Wednesday.

Trying to contain the crisis, Italy is expected to approve a 54-billion-euro (47 billion pound) austerity package on Wednesday, although news of the measures has so far done little to reverse investor alarm over whether the country can manage its debts.

Prime Minister Silvio Berlusconi's government has tabled a confidence motion which would force it to resign if it lost. An initial vote is scheduled for around 8 a.m. EDT ahead of final approval of the austerity package around 2 p.m. EDT.

Greek Prime Minister George Papandreou will hold a conference call on Wednesday with French President Nicolas Sarkozy and German Chancellor Angela Merkel. The call is scheduled for 12 p.m., Papandreou's office said.

A rebound in stock prices and the euro stalled in Asia on Wednesday as investors remained spooked about a crisis that has also roiled French banks because of their debt exposure to both Greece and Italy, raising fears of a fresh banking crisis.

A combination of a banking crisis akin to the global credit crunch, a Greek default and a financial meltdown in Italy could tear the euro zone apart.

"I think there is a possibility, if the wrong steps are taken, that the system goes off the rails," Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro's survival was at risk.

Merkel on Tuesday sought to quash talk of an imminent Greek default or its exit from the euro zone. Confused statements from Germany and France over whether they would issue a joint statement on Greece sent markets gyrating up and then down on Tuesday.

Greece has said it would run out of cash in a few weeks and needs an 8 billion euro tranche in October to pay wages and pensions.

Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.

Her economy minister said earlier this week there should be no taboos in stabilizing the euro, including an orderly bankruptcy of Greece. And lawmakers from her coalition have said in recent days that Greece may have to leave the euro zone -- a move Citigroup's chief economist warned would lead to "financial and economic disaster."

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