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Europe hastens to build up debt crisis defenses

Sep 23, 2011, 7:07 p.m.
Commuters make their way in front of an Alpha bank branch in Athens September 23, 2011. REUTERS/Yiorgos Karahalis

By Lesley Wroughton and Dina Kyriakidou

WASHINGTON (Reuters) - European policymakers are quickening their preparations to cope with an escalation of the region's debt crisis as talk of a possible Greek default gained pace on Friday.

Finance chiefs from around the world have turned up the heat on Europe to do more to prevent Greece's debt woes from infecting other euro zone countries and the world economy.

Concern now appeared to be turning toward safeguarding the banking system more than rescuing Greece, as international lenders were increasingly losing patience with Athens consistently missing fiscal and reform targets.

British finance minister George Osborne said the euro zone needed to gain control of the situation by the time leaders of the Group of 20 economies meet in France in November.

"They have six weeks to resolve this crisis," he said on the sidelines of semiannual policy discussions in Washington.

World stock markets, which had plunged to a 14-month low on fears about the scale of the crisis, steadied after European Central Bank officials said they would use more firepower to help the banking system withstand financial strains.

Pressure is growing on European governments for a recapitalization of the region's banks to strengthen them in the event of a Greek default.

At the same time, European policy-makers seemed to be warming to the idea of giving more muscle to their bailout fund, which would be sorely tested if Athens defaulted.

Greek Finance Minister Evangelos Venizelos was quoted by two newspapers as saying an orderly default with a 50 percent haircut for bondholders was one way to resolve the heavily indebted euro zone nation's cash crunch.

Greece is in tense talks with the International Monetary Fund and European authorities, known as the troika, to secure a new 8 billion-euro installment of its rescue package to avoid bankruptcy in October.

In return for aid, Athens pledged austerity measures, but negotiators have expressed frustration at what they say is Greece's slow reform pace. The nation's finance minister is due to meet the head of the IMF on Sunday.

"The troika officials said they were going over again measures they had agreed to months before. They said they had a sense of deja vu," a source close to the talks said on condition of anonymity.

October's loan payment, however, is still widely expected to be made. The next installment is due in December.

ECB President Jean-Claude Trichet urged authorities to take decisive action, saying risks to the financial system had "increased considerably."

Lawrence Summers, a former U.S. treasury secretary, gave a somber assessment of the dangers facing the world economy, including a U.S. recovery that has neared a standstill.

"This is the 20th annual meeting (of the IMF and World Bank) I've been privileged to attend. There has not been a prior meeting at which matters have had more gravity and at which I have been more concerned about the future of the global economy," Summers told a discussion panel.

PUZZLE PIECES

As European policymakers looked to piece together a bolder crisis-fighting strategy, investors took some relief as three officials said the ECB could revive its one-year liquidity lines to shore up banks.

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