G-20 gives EU one week to fix debt crisis

European leaders have one week to settle differences and flesh out a strategy to terminate their sovereign debt crisis as global finance chiefs warn failure to do so would endanger the world economy.

Group of 20 finance ministers and central banks concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an October 23 summit of European leaders in Brussels as the deadline for it to be delivered.

?The risk of a recession would be increased dramatically were the Europeans to fail to accomplish goals that they?ve set for themselves,? Canadian Finance Minister Jim Flaherty said after the G-20 meeting, which ended October 15.

Two years to the week since Greece triggered the turmoil by revising its budget math, the inability of policy makers to stamp it out has pushed the Greek government to the edge of default and the European economy close to recession. Stocks and the euro extended last week?s gains after the meeting.

The Stoxx Europe 600 Index added 1.3 percent to 241.59 at 9:15 a.m. in London. The euro rose 0.2 percent to $1.3904, following a 3.8 percent weekly advance, the biggest since March 2009.

Greece?s Vote

Hurdles to overcome for an accord include resistance from bankers to a deeper restructuring of Greek debt as well as disagreements between Europe?s capitals over just how to multiply the firepower of their bailout fund and recapitalize financial institutions. Greece?s parliament faces another tight vote on new fiscal measures as soon as this week, a showdown that Prime Minister George Papandreou needs to win to ease the way for more foreign financing.

The Brussels meeting ?has the potential to turn into a positive historic moment,? Joachim Fels, London-based chief economist at Morgan Stanley, wrote in a note to clients yesterday. ?But it could also easily turn into a negative catalyst.?

Europe?s plan, which has still to be made public, includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and magnifying the strength of the 440 billion-euro ($611 billion) temporary rescue fund known as the European Financial Stability Facility, people familiar with the matter said last week. [Blooomberg]

?The plan has the right elements,? US Treasury Secretary Timothy F. Geithner said in Paris. ?They clearly have more work to do on the strategy and the details.?

The G-20 officials — who met to prepare for a November 3-4 gathering of leaders in Cannes, France — said in a statement that the world economy faces ?heightened tensions and significant downside risks.? European authorities must ?decisively address the current challenges through a comprehensive plan,? they said.

The policy makers held out the possibility of rewarding European action with more aid from the International Monetary Fund, while splitting over whether the Washington-based lender?s $390 billion war chest needs topping up.

Europe?s latest strategy hinges on putting Greece, whose government forecasts its debt to reach 172 percent of gross domestic product in 2012, on a sustainable path. Austerity has plunged the country deeper into recession and provoked civil unrest that threatens political stability.

Papandreou faces the latest test of his party?s unity as soon as this week when he asks Parliament to approve steps including bigger pension and wage cuts as well as plans that may lead to the dismissal of 30,000 state workers. One ruling party lawmaker, Thomas Robopoulos, said he may quit his seat ahead of the vote, exposing the tensions in Papandreou?s socialist party. It has 154 seats in the 300-member chamber.

Failure to limit the risk of a default to Greece led to Portugal and Ireland requiring bailouts, and markets are now targeting larger debt-strapped nations such as Italy. Investors are concerned that if the crisis keeps festering, the world economy could face a repeat of the chaos that followed the 2008 collapse of Lehman Brothers Holdings Inc. The euro area is already set to suffer a renewed recession, say economists at JPMorgan Chase

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