Washington: The world’s major economies pledged on Thursday to prevent Europe’s debt crisis from undermining banks and financial markets, and said the euro zone’s rescue fund would be bolstered.
Under pressure from investors to show action, finance ministers and central bankers from the Group of 20 economies said they would take all steps needed to calm the stresses wracking the global financial system.
“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the G20 said in a communique after a dinner meeting.
The share prices of several European banks have tumbled and their funding costs have risen as investors worried about their exposure to debt issued by Greece and other debt-heavy European countries.
World stocks fell on Thursday to their lowest level in 13 months, hurt by the risk of a new US recession and weaker economic data from China as well as Europe’s debt problems.
In a sign the euro zone would add to the potency of its €440 billion financial rescue fund, the G20 statement said the bloc’s members would implement “actions to increase the flexibility of the EFSF and to maximize its impact” by the group’s next ministerial meeting in October.
The United States has proposed that Europe could leverage the European Financial Stability Facility, giving it more clout to protect the euro zone and its banks.
A US official, speaking after the G20 meeting, said the group showed a heightened sense of urgency but did not discuss a specific mechanism to leverage or expand the bailout fund.
Earlier on Thursday, US treasury secretary Timothy Geithner voiced optimism that Europe would devote more of its own resources to backstop euro area governments and banks.
“I am very confident they’re going to move in the direction of expanding (their) effective financial capacity,” he told reporters ahead of the G20 meeting.
“They’re just trying to figure out how to get there in a way that is politically attractive.”
Finance chiefs have gathered in the US capital ahead of the semiannual meetings of the International Monetary Fund and World Bank.
Earlier on Thursday, the leaders of seven big economies stressed the need to contain the euro zone crisis, and finance officials from the so-called Brics countries, including heavyweights China, Brazil and India, said they would consider giving more funds to the International Monetary Fund to boost global stability.
But India said developing countries were not in a good position to bail out richer economies and the US official said the G20 had not talked about emerging economies providing the IMF with more funds.
The euro area crisis, centered on a fiscal meltdown in Greece, has put a strain on the IMF’s resources. With key economies teetering on the edge of recession, more countries could seek emergency loans, quickly depleting its capital. Highlighting the growing role of the Brics in the world, China’s central bank chief, Zhou Xiaochua, said major emerging markets should boost domestic demand to take up some of the slack caused by weakness in the United States and Europe.
“In today’s crisis period, internal demand of each economy is important, and we should find a way to enlarge internal demand in our economy,” he said.
But Zhou made no mention of repeated US calls for Beijing to let its yuan currency rise faster.
In Frankfurt, a European Central Bank study warned the entire euro currency project was now in peril.
The study, perhaps the most stern warning about the euro’s future from a central banker, was a parting shot from ECB chief economist Juergen Stark, who resigned this month after opposing the bank’s purchases of troubled countries’ bonds.