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Under fire, Europe works to bolster debt crisis fund

Sep 25, 2011, 10:52 p.m.
European Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference on the interim economic forecast at the EU Commission headquarters in Brussels September 15, 2011. REUTERS/Thierry Roge

By Dina Kyriakidou and Dan Flynn

WASHINGTON (Reuters) - European policymakers began working on new ways to stop fallout from Greece's near-bankruptcy from inflicting more damage on the world economy after stinging criticism for failing to stem the debt crisis.

After a weekend of being told by the United States, China and other countries that they must get more aggressive in their crisis response, European officials focused on ways to beef up their existing 440 billion-euro rescue fund.

Deep differences remained over whether the European Central Bank should commit more of its massive resources to shoring up Europe's banks and help struggling euro zone member countries.

Shares and the euro fell in Asia on Monday as investors reacted cautiously to the weekend news. Financial markets have plunged in recent weeks on concerns about the ability of Europe to get a grip on the crisis.

U.S. Treasury chief Timothy Geithner, in unusually blunt comments, said the risks from Europe were enormous.

"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table," he said in speech to the International Monetary Fund on Saturday.

Europe came under more pressure on Sunday when a top IMF official said the ECB was the only player big enough to "scare" financial markets, which have punished many euro zone members.

"The ECB is the only agent that can really scare the markets," Antonio Borges, the IMF's top official for Europe, told top economic policymakers from around the world.

However, Germany and many top officials within the ECB itself are wary about the central bank being drawn more deeply into supporting Greece and other debt-stricken states.

"It is not helpful that we have an avalanche of new proposals every week," ECB Governing Council member Ewald Nowotny said.

Markets fear that European banks could be dragged down by their exposure to Greece and other debt-strapped euro zone nations, and analysts say a bailout fund of around 2 trillion euros would be needed if the crisis spread to Italy and Spain.

A senior European official hinted that kind of firepower was being contemplated.

"We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet," the official said.

Financial markets signaled some doubts that bolder steps would emerge soon given a lack of details from weekend comments and differences between euro zone leaders.

Ratings agency Standard & Poor's raised further doubts, suggesting that efforts to bolster the rescue fund would potentially trigger ratings downgrades in the euro zone region.

Asian shares trading outside Japan fell 2.3 percent to a 16-month low and the dollar index was up for the fourth session in a row.

"We believe this type of plan would be seen as a credible solution to the crisis," said Warren Hogan, chief economist at ANZ Bank in Sydney.

"However, this plan is still only in the 'rumor' stage, and it may face some tough hurdles in order to be passed by all EU authorities, indeed headlines are already suggesting some German dissent."

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