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

"I think it might be advisable to think about reintroducing this approach," ECB governing council 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.

The growing talk of a Greek default met with stiff opposition from German Chancellor Angela Merkel. She told a meeting of her political party members that default was not an option because it might trigger a domino effect with other struggling economies. "The damage would be impossible to predict," Merkel warned.

Politicians in northern Europe, especially in Germany, have opposed dedicating more money to fight a crisis that they see as caused by the profligacy of other euro zone members. Now, leaders will have to navigate the tricky politics.

"It's not a question of ability for the euro zone," Bank of Canada Governor Mark Carney. "It is a question of political will."

ECB governing council member Klaas Knot told a Dutch daily a Greek default could no longer be ruled out, a warning echoed by the IMF's top official in Europe, Antonio Borges.

"If the Greeks do what they have to do there will be no default," Borges said. "But on the other hand if they hesitate, procrastinate, find it impossible ... then it is very hard to avoid."

G20 finance ministers and central bankers had pledged on Thursday to "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 G20 communique 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 called on Europe to leverage up the EFSF to give it more firepower.

(Additional reporting by IMF reporting team in Washington, Sakari Suoninen in Frankfurt, Natsuko Waki and Ana Nicolai da Costa in London, Lefteris Papadimas and Ingrid Melander in Athens; Writing by William Schomberg, Glenn Somerville and Paul Taylor; Editing by Chizu Nomiyama and Neil Stempleman)

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