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U.S., China pressure Europe, warn of cascading default

Sep 24, 2011, 8:06 a.m.
European Central Bank (ECB) Governor Jean-Claude Trichet (centre L) and U.S. Treasury Secretary Timothy Geithner (centre R) smile as they gather for a group photo with other International Monetary Fund (IMF) governors, during the World Bank/IMF Annual Meetings in Washington September 24, 2011. REUTERS/Jonathan Ernst

By David Lawder and Lesley Wroughton

WASHINGTON (Reuters) - The United States and China piled pressure on Europe on Saturday to get to grips with its debt crisis before it risks causing bank runs and pushing the global economy into ruinous recession.

The U.S. Treasury chief, in his most explicit warning to date about the crisis, said it was time for the European Central Bank to step up and take a central role to get it under control.

World financial markets have been wracked by fears the Greek debt crisis could overwhelm other euro zone countries and their banks, but took some comfort on Friday from signs of new resolve by European officials to bolster defenses after nearly two years of what many see as half-hearted action that has policy-makers talking openly of possible Greek default.

"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally," U.S. Treasury Secretary Timothy Geithner said in a speech at the International Monetary Fund.

"Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe."

Geithner's warning was echoed by China's central bank governor Zhou Xiaochuan, but with an added twist that countries running big deficits, like the United States, also must act responsibly.

"The sovereign debt crisis must be resolved promptly to stabilize market confidence, and forceful and credible fiscal consolidation measures are needed in relevant economies to alleviate sovereign debt stress," Zhou told the IMF.

The semi-annual gathering of the IMF and World Bank is dominated by worry about the risk that Europe now poses to the rest of the world. As European Central Bank President Jean-Claude Trichet put it on Friday: "We (the euro zone) are the epicenter of this global crisis."

Financial markets are highly anxious about potential defaults by countries like Greece and other heavily indebted European nations and the possibility that Europe's banking system could be at risk given the size of their holdings of debt issued by weak euro zone countries.

"European governments should work alongside the ECB to demonstrate an unequivocal commitment to ensure sovereigns with sound fiscal policies have affordable financing, and to ensure that European banks have recourse to adequate capital and funding to win the full confidence of their depositors and creditors," Geithner said.

The United States has been pushing for a heightened role for the ECB -- the central bank for the 17 nations using the euro as their currency. Washington has pointed to the way that the Treasury and the Federal Reserve cooperated to bolster the financial sector during the 2007-2009 financial crisis.

Geithner and Fed Chairman Ben Bernanke met on Friday with top officials from the European Central Bank and other national central banks from Europe, in part to discuss international financial regulatory reform.

The tempo of warnings to Europe to come together on a solution to its debt issues -- either by avoiding any defaults or by protecting its financial system against the consequences -- has gathered steam but leaders still need time to respond.

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