In Europe: Europe Gets Emerging Market Crisis Ultimatum As G-20 Meet

18 June 2012

Even as the imminent threat of a Greek Euro-exit has been averted, there remain calls for “rigorous methods to manage the crisis.”

European leaders are under pressure at the Group of 20 summit in Mexico to stamp out the debt crisis as global partners hint at help to keep the world economy afloat.

As elections in Greece reduced the immediate risk of the euro area’s breakup, China and Indonesia signaled growing exasperation with more than two years of European crisis- fighting that has failed to stem the threat of global contagion. World Bank President Robert Zoellick said that policy makers bungled their attempt to rescue Spain’s banks.

“I hope that one way or another our European colleagues will reach an agreement on rigorous methods to manage the crisis,” Indonesian President Susilo Bambang Yudhoyono, who heads Southeast Asia’s biggest economy, said in a speech in the Mexican resort of Los Cabos yesterday. “The absence of such methods will have unsettling consequences to all of us.”

The two-day G-20 summit starting today kicks off a week of crisis meetings taking place after Spain this month became the fourth euro-region nation to seek a bailout amid the weakest global economy since the 2009 recession.

G-20 officials at Los Cabos were still negotiating last night the language to be used in their communique to be issued at the summit’s conclusion. The talks included discussions over ways to stimulate the world economy if needed using language similar to pledges made at Cannes, France last year, a Canadian official said on condition they not be named because they’re not authorized to be publicly identified.

Boost Demand

At Cannes, some European countries pledged to reduce deficits while emerging markets and those with healthier finances said they’d boost demand if needed.

Stocks and the euro rose after Alexis Tsipras, the Greek Syriza party leader who advocates reneging on bailout terms, failed to win yesterday’s parliamentary elections, reducing the risk ofGreece becoming the first country to exit the 17-nation currency region. The Group of Seven nations said in a statement that it was looking forward to working with the next Greek government.

German Chancellor Angela Merkel, French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy discussed the Greek election outcome by phone late yesterday as they headed to Mexico.

EU Summit

The heads of the four biggest euro economies next meet in Rome on June 22, before a full European Union summit in Brussels on June 28-29 that will discuss paths to closer political and economic union in a bid to regain market confidence.

As countries from the U.S. to China prod euro-area leaders to keep the crisis from spreading, a boost in the International Monetary Fund’s global financial backstop is moving back into focus after Merkel called for the rest of the world to do more. The G-20 will boost the $430 billion firewall the International Monetary Fund announced in April, Mexican President Felipe Calderon, the meeting’s host, said on June 16.

“I estimate that there will be a larger capitalization than the pre-accord reached in Washington, which will be finalized here,” Calderon said in Los Cabos, the Pacific resort where the leaders are meeting. The summit’s final statement will endorse steps taken by Europe to achieve closer monetary and fiscal union, he said yesterday.

European Stocks

European stocks advanced for a second week last week amid speculation that central banks would take steps to stimulate the global economy. The Stoxx Europe 600 Index (SXXP) has declined 10 percent from its high on March 16 as Spain’s call for aid sent Italy’s borrowing costs higher.

Greek election winner Antonis Samaras, who said the country chose “to stay anchored with the euro,” today begins his second bid in six weeks to form a coalition. Euro-area finance chiefs pressed him to form a government that would keep bailout aid flowing.

European officials indicated a willingness to ease the terms of rescue loans as long as Greece, with just weeks of cash in the bank, re-commits to their austerity demands. Merkel expects Greece to stand by its “European obligations,” according to a statement from the Chancellery in Berlin.

European Union President Herman Van Rompuy and European Commission President Jose Manuel Barroso, also in Los Cabos, said they continue to support Greece’s membership in the euro and look forward to a government being formed quickly.

Wasted Bullet

Zoellick, speaking in Los Cabos, said European leaders have increased market uncertainty through their “incremental” steps and fumbled the announcement of a 100 billion-euro ($127 billion) banking rescue for Spain, he said. They “took a very big bullet, and wasted it,” he said.

“This meeting is coming at an absolutely critical time and we’re waiting for Europe to tell us what it is going to do,” Zoellick, whose mandate ends June 30, said during a panel discussion. “The danger we’re creating is that the pattern of policy making is increasing uncertainty and making markets more nervous.”

European Central Bank President Mario Draghi, who is helping draw up the road map for closer integration, said on June 15 the ECB will continue to provide liquidity to solvent banks. The ECB has already lent banks more than 1 trillion euros for three years.

China President Hu Jintao, in a written interview with a Mexican newspaper posted on the Chinese Foreign Ministry’s website today, said the G-20 should adopt a “constructive and cooperative approach” to “encourage and support the European efforts and jointly provide confidence to the markets.”

Business Leaders

With market uncertainty persisting, business leaders at a Los Cabos forum before the G-20 urged policy makers to find a way to solve the European crisis as soon as possible.

“Everybody thinks the faster they find a way to handle these challenges at the moment in Europe, the better for everybody,” Ditlev Engel, president and chief executive officer of Vestas Wind Systems A/S (VWS), the world’s largest wind turbine maker, said in an interview.

In Greece, “it looks like there could be a coalition that could be really useful for achieving some stability,” Marcus Wallenberg, chairman of Swedish defense company Saab AB (SAABB), said in an interview in Los Cabos. “Calming down the markets going forward is the most important issue. It should be more positive than anything else right now.”


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