Europe's debt crisis high on forum's main agenda

Updated: 2012-01-30 08:18

By Simon Kennedy and Jana Randow (China Daily)

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DAVOS, Switzerland - Global finance chiefs warned no economy is safe from Europe's debt crisis, adding urgency to their calls for its governments to deliver a swift resolution.

Policy makers from Hong Kong to Canada used the last full day of the World Economic Forum to push euro-region counterparts to boost their bailout fund to protect Italy and Spain. They also pressed Greece and its creditors to strike a credible agreement to cut the nation's debt.

Failure to deliver home-grown solutions would cost Europe any chance of further outside support and undermine the International Monetary Fund's push for more crisis-fighting resources of its own, officials said. The concern tempered optimism from earlier in the week when delegates expressed hope that Europe had succeeded in calming markets after two years of turmoil.

"I've never been as scared as I am about the world," Donald Tsang, Hong Kong's chief executive, said on Saturday in Davos, Switzerland. "Nobody's immune. You need decisive action. You need to inspire confidence."

Bank of Canada Governor Mark Carney estimated the European crisis will subtract 1 percentage point from global growth by the end of 2012 "and that's in a world where this crisis is contained". Europe's pain could be transmitted via trade or financial channels with banks already hoarding cash or investing only in domestic markets, he said.

Yale University Professor Robert Shiller echoed the concern by estimating the eurozone will contract this year by more than the 0.5 percent predicted by the International Monetary Fund (IMF). Nouriel Roubini, co-founder of Roubini Global Economics LLC, said Greece may be forced to quit the single currency within 12 months.

"The eurozone is a slow-motion train wreck," Roubini said.

The concern leaves the eurozone's leaders under pressure to raise the size of their rescue funds from the limit of 500 billion euros set to take effect in July when a permanent fund comes online separate from the temporary European Financial Stability Facility.

While they plan to reassess that amount in March, the United Kingdom Chancellor of the Exchequer George Osborne indicated they may need to do so sooner by demanding steps in "the next few weeks". EU leaders next meet on Monday in Brussels to draw up a fiscal compact to strengthen governance of the euro area.

Osborne also sided with the consensus by urging a fast accord on slashing Greece's debts, three months after creditors agreed to implement a 50 percent cut in the face value of more than 200 billion euros of debt. Negotiations continued in Athens over the weekend.

"The fact we're still at the beginning of 2012 talking about Greece is a sign this problem hasn't been dealt with," Osborne said.

Carney estimated Europe will cut 1 percent off the level of global gross domestic product by the end of 2012 "and that's in a world where this crisis is contained". The region's pain could be transmitted by the effects on demand of its budget cuts and through financial channels with banks already hoarding cash or investing only in domestic markets, he said.

Carney said a "credible" agreement is required even if that means increasing the write-off or having the European Central Bank take losses on some of its Greek bonds, something it has so far rejected. Turkey's Deputy Prime Minister Ali Babacan said Greece should be prevented from defaulting because "once that door is open" others could follow.

Policy makers from Japan and the UK said while they and others might add to the IMF's coffers, a prerequisite was Europe putting up more money of its own. Without "firm action, I don't think developing countries like China are willing to pay more money", Japanese Economy Minister Motohisa Furukawa said.

Seeking to insulate the world from Europe's woes, IMF Managing Director Christine Lagarde wants to boost her institution's lending capacity by $500 billion. She made her pitch by saying the world had "never been so interconnected" and that the IMF was always repaid with interest.

Bloomberg News