G7 to hold emergency euro zone talks, Spain top concern

Finance chiefs of the Group of Seven leading industrialised powers will hold emergency talks on the euro zone debt crisis on Tuesday in a sign of heightened global alarm about the threat posed by strains inside the 17-nation monetary union.

With Greece, Ireland and Portugal all under international bailout programmes, financial markets are anxious about the risks from a Spanish banking crisis and fret a Greek election on June 17 could lead Athens to leave the single currency and precipitate yet more economic turbulence.

“We have reached a point where we need to have a common understanding about the problems we are facing,” Japanese Finance Minister Jun Azumi told reporters.

Earlier, Canadian Finance Minister Jim Flaherty said ministers and central bankers of theUnited States, Canada, Japan, Britain, Germany, France and Italy would hold a special conference call, raising pressure on the Europeans to act.

Toronto and Washington both called for more action.

“Markets remain sceptical that the measures taken thus far are sufficient to secure the recovery in Europe and remove the risk that the crisis will deepen,” White House press secretary Jay Carney told reporters.

In a sign of increasing concern about the euro area's debt crisis, Australia's central bank cut interest rates on Tuesday by 25 basis points to 3.50 per cent, the lowest level in two years. It cited further weakening in Europe and a deterioration in market sentiment.

Pressure is building in particular on Germany, the European Union's paymaster, to back away from its prescription of fiscal austerity for the region's weaker economies and to work harder on fostering short-term growth.

A G7 source familiar with plans for the call, likely to be held late in the Asian night, said the group would urge more progress at an EU summit on June 28-29, though this alone would probably disappoint global markets.

Asian stocks rallied on Tuesday on hopes for the G7's intervention. The euro extended gains to a one-week high.

But there was only a very small chance the G7 would go so far as to pledge coordinated action to curb excessive volatility in currency markets, the source added. Japan, for one, fears a strong yen, which has been a safe haven for investors during the euro zone crisis, could help tip its economy into recession.

The G7 could also call for concerted action at the upcoming summit of the wider Group of 20 major economies in Mexico on June 18-19, the source said. The G20, which includes China, played a prominent role during the 2008-2009 financial crisis.

A G20 official in Asia said the grouping, which also includes Brazil and India, could look to put pressure on Germany to switch to stimulus mode, as part of a wider call for strong, developed economies to step up spending.

“Germany and Canada could be seen as those having fiscal capabilities among the advanced economies,” the official said.

Another source familiar with the G20's deliberations said he was unaware of any plan for the group to also hold an emergency phone hook-up ahead of the summit later this month.

FEARS OF BANK RUN IN SPAIN

Germany said on Monday it is up to Spain, the latest euro zone country in the markets' sights, to decide if it needs financial aid, after media reports that Berlin had pressed Madridto request aid.

Germany's stance would effectively rule out Spain's desire for euro zone rescue funds to lend money directly to recapitalise Spanish banks without Madrid accepting a bailout programme. Spain's banks are weighed down by bad property debts.

However, Berlin is pressing reluctant euro zone partners, including close ally France, to agree to give up more fiscal sovereignty under closer European fiscal union.

A separate G7 source, speaking on condition of anonymity because of the sensitivity of the issue, said there were concerns about the risk of a bank run in Spain, which is struggling to recapitalise nationalised lender Bankia and smaller banks stricken by the collapse of a property bubble.

"There is concern on whether there will be a bank run in Spain that could have repercussions beyond the euro zone," the source said.

The United States, which holds the G7 chair, wants Europe to deal more forcefully with its crisis. President Barack Obama, seeking re-election in November, has pointed to Europe's crisis as a problem for the weakening U.S. economic recovery.

“We're hoping to see accelerated European action over the next several weeks, including in the run-up to the Leaders' G20 meeting in Mexico,” a US Treasury Department official said, stressing the need to strengthen Europe's banking system.

MARKET TEST

Spain's borrowing costs have soared to around 6.6 percent for 10-year bonds with the risk premium over safe haven German Bunds reaching a euro era record. Madrid plans to issue 1-2 billion euros in 10-year debt on Thursday in a key market test.

The United States has said it is unwilling to provide more money to the International Monetary Fund, which could support the euro zone. The second G7 source said there was little prospect of the global community acting as one to contain the crisis.

A senior Brazilian official added to the pressure on Germany. "European countries with enough space to stimulate the economy, even via fiscal stimulus (not many that can do that), should do it now," said the official.

EU Chairman Herman Van Rompuy said he would put forward a roadmap at this month's summit for closer economic union by the end of 2012, including banking integration proposals.

Germany, keen to limit liabilities for its taxpayers as the biggest contributor to euro zone rescue funds, has so far rejected proposals for a banking union with a joint deposit guarantee and a common resolution fund for failing banks.

Underscoring how complex the process of deeper political union in Europe is likely to be, aGerman government paper seen by Reuters said Germany does not expect Europe to take any final decisions on strengthening economic policy coordination between member states until the spring of next year.

CHINA EYES GREEK EXIT

China has instructed key agencies including the central bank to come up with plans to deal with potential economic risks of a Greek withdrawal from the euro zone, three sources with knowledge of the matter said.

The plans may include measures to stabilise the yuan currency, increase checks on cross-border capital flows and policies to stabilise China's economy, they said.

Euro zone officials have sought to persuade Beijing, which has vast foreign currency reserves, to back the euro zone by buying its troubled countries' bonds. But Chinese officials have been reluctant, concerned at the risks and mindful of Chinese public criticism.

Copyright @ Thomson Reuters 2012