Euro zone crisis set to dominate G20 meeting in Paris

Reuters News
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Posted: Oct 13, 2011 6:24 PM
Euro zone crisis set to dominate G20 meeting in Paris

By Catherine Bremer and Daniel Flynn

PARIS (Reuters) - G20 finance chiefs and central bank heads meet in Paris on Friday urgently needing to find a convincing solution to a deepening euro zone debt crisis that has fanned fears of a global slide into recession.

A source at the French finance ministry -- which is battling to flesh out the bones of a crisis resolution plan with Germany in time for an October 23 European Union summit -- said the euro zone was more pressing than anything else on the two-day agenda.

"This meeting takes place in a context where the absolute priority for the success of the G20 is to find the elements for the stability of the euro zone," the source said.

With impatience growing over the crisis, and its implications for the rest of the world, finance chiefs from outside the bloc are expected to speak frankly.

"This meeting is an important staging point before (a G20 summit in) Cannes and a valuable opportunity to put pressure on the euro zone," said a non-euro zone G20 delegate.

Canadian Finance Minister Jim Flaherty set the tone late on Thursday, telling reporters before leaving Ottawa that euro zone actions were short of what is needed.

Unlike in 2009 when the G20 launched a coordinated stimulus to pull the world out of economic crisis, the forum is at risk of division as the rest of the world chafes at Europe's dithering over a debt crisis that started 18 months ago in Greece, and as Washington and Beijing spar over the yuan.

Paris and Berlin are taking time to agree on how to recapitalize banks and while Germany favors a second round of losses for Greek bondholders, Paris is reticent. The two euro heavyweights also differ on the idea of joint bond issuance for the euro zone, with Germany loath to see its debt costs rise.

The Franco-German crisis plan is likely to ask banks to accept big losses on their Greek debt and should lay out a system for recapitalizing troubled banks, whose shares have been pounded by fears about Greek exposure.

At its core will be an agreement on how to increase the firepower of the EFSF rescue fund, and it should also set out a timeframe for ramping up economic coordination, with closer governance and explicit national laws on balancing budgets.

The G20 may refer to the euro crisis in its communique and in closing news conferences on Saturday evening, but little else of substance is likely to be inked in.

CHINA MAY OFFER GROWTH, NO YUAN SHIFT

This week's talks may give the green light to regulators for new rules on banks deemed 'too big to fail', including capital surcharges, due to be officially approved in Cannes.

Yet any concrete progress on bigger goals such as setting parameters to measure global imbalances and reining in commodity market volatility and speculative capital flows is unlikely to come before a November 3-4 summit in Cannes, where France passes the G20 baton to Mexico.

The finance ministry source said that for Cannes France hoped to have two or three measures agreed for countries showing imbalances: consolidation measures for those with high deficits and stimulus measures for those with surpluses.

"We are going to try to make some progress and obtain, perhaps not tomorrow or Saturday but by Cannes, a list of measures country by country which corresponds to what is needed to relaunch global economic activity," he said. "These must be measures which will have an impact on the real economy."

A separate G20 source said after preparatory talks late on Thursday that China would commit in Paris to boost its consumption through a five-year plan, via households and companies as well as infrastructure, as the G20 seeks tough fiscal commitments from the euro zone and the United States.

The G20 countries make up 85 percent of global output.

An April G20 meeting placed seven large economies under review -- the debt-burdened United States, export-rich China, France, Britain, Germany, Japan and India. Officials have said privately the aim was to get Beijing to discuss the yuan, and China's cooperation is essential to the success of the process.

France has dangled the prospect of the yuan entering the basket of currencies making up the IMF's Special Drawing Right (SDR) in a bid to divert the debate away from its value and onto the criteria of free "usability" required for this.

The euro zone crisis has derailed Sarkozy's hopes of using his G20 presidency to launch a fundamental rethink of the global financial system and its reliance on the U.S. dollar.

China and the United States sparred this week over a U.S. Senate bill to press Beijing to raise the yuan's value, and the issue is likely to create a sideshow at the G20 talks, even if the euro zone crisis pushes it off center stage.

"China won't play a big role at the meeting," said He Fan, deputy head of the Institute of World Economics & Politics at the Chinese Academy of Social Sciences government think tank.

"China cannot do much over the European debt crisis. China will not buy European bonds on a large scale. There are not many choices out there. Italy is the biggest bond issuer in Europe, but I doubt China will buy its bonds. The question for China is how to safeguard its investment in Europe," He said.

He added that China could participate in a multilateral framework for rescuing European banks, such as via the IMF.

A G20 official told Reuters on his way out of talks on Thursday that China and Japan were both open to lending more funds to the IMF to help with the euro zone crisis.

Two other sources said several BRICS countries, notably India, China and Brazil, favored bolstering the IMF's capital as a way to contribute to a rescue for Greece, but without altering voting rights in the lender.

Brazilian Finance Minister Guido Mantega also said this week that extra IMF support may be debated.

(Additional reporting by Randall Palmer, David Milliken, Francesca Landini, Kevin Yao and Abhijit Neogy; Editing by Louise Ireland)