Several major partners in the euro area on Wednesday called its leaders to quickly overcome the crisis of sovereign debt worrying about its consequences for the future of the euro and the global economy as finance ministers and central bankers G20 meeting in Washington.
The continuing crisis in the euro area and new signs of slowing global economy led to a sharp correction in equity markets, lower long-term rates and a rising dollar.
Governments and institutions in the euro area must act quickly to resolve the crisis of sovereign debt at the risk of contagion in the global economy, said seven of the leaders of the G20 in a letter to French President Nicolas Sarkozy, France chairing the G7 and G20.
In their letter, the leaders of Australia, Canada, Indonesia, Great Britain, Mexico, South Africa and South Korea are asking the leaders of the euro area to examine "all options to ensure long term stability of the second most widely used international currency in the world."
The U.S. Treasury Secretary Timothy Geithner has also been more urgent considering that it was more important to contain the crisis to support European growth and that it was essential to mobilize sufficient resources to avoid a default of Greece.He expressed confidence that Europe make more bold to resolve the crisis in the weeks and months ahead.
The European Financial Stability Fund (EFSF) will be fully operational and strengthened in the second half of October, said European Commissioner for Economic and Monetary Affairs Olli Rehn.
However, he felt that the Eurobonds, presented by their proponents as a solution to the debt crisis, would become "junk bonds" without better coordination of European economic policies.
The publication of purchasing managers index (PMI) showing a contraction in private sector activity in the euro area and China has fueled the drop in equity markets, the European indices yielding around 5.0 % in closing while the U.S. indices gave up over 3.0% in mid-session.
Finance ministers and central bankers from the G20 meeting in Washington at the annual meetings of the IMF and the World Bank, will discuss the crisis on Thursday night during a dinner but it is not anticipated that 'they publish a statement on the responses they intend to make.
THE EURO IN DANGER, SAYS STUDY OF THE ECB
The single European currency is at risk because of uncontrolled spending of the States of the euro zone and the debt crisis that ensued, warns a study by the European Central Bank (ECB), co-authored by Jürgen Stark, who has since resigned, because he seems to agree with the policy of buying government bonds introduced by the ECB in the fight against debt crisis in the euro area.
"The budgetary imbalances sharp rise in the euro area as a whole and the extreme situation of some individual countries could undermine the stability, growth and employment, as well as the sustainability of economic and monetary union ( EMU) itself, "it said in the study whose publication has plunged the euro fell to a seven-month low against the dollar, less than $ 1.35.
The European Committee of systemic risk (ESRB), new financial regulatory authority of the European Union, for its part warned that the consequences of the crisis of sovereign debt had significantly increased risks of financial instability in Europe.
"The high degree of interconnection within the EU financial system led to a rapid increase in the risk of contagion significantly.This threatens the financial stability within the EU as a whole and has negative consequences on the real economy in Europe and beyond. "
The ESRB, chaired by Jean-Claude Trichet, president of the European Central Bank, called for a "quick and decisive action" of the euro zone leaders whose efforts to contain the crisis is widely perceived as inadequate and too slow.
According to the ESRB, national supervisors "should coordinate their efforts to strengthen bank capital (…) taking into account the need for a transparent and consistent exposure to sovereign issuers."
Executive Director of the IMF, Christine Lagarde, renewed his call for a recapitalization of banks in Europe including the leaders of the institutions concerned and the governments of several countries in the euro area had downplayed the need for highlighting the strength of bank balance sheets in the zone.
Speaking on the eve of the G20 and the IMF, the Canadian Minister of Finance was alarmed by the possibility of credit crunch if the Europeans could not settle the Greek problem, by far the most critical within the euro area.
"The first item on the agenda …is that Europe needs to accelerate, they must resolve the issue of Greece, "said Jim Flaherty, the Canadian Broadcasting Corporation.
"Otherwise the market will prevail and we will have some form of crisis, it will become a banking crisis, affecting banks around the world, and we have a new credit crisis will cause a contraction of the real economy.We need to fix this, "he said.
The lack of solution to the crisis continued to weigh on European banks, the first of which French banks because of their exposure to Greece and Italy.
BNP Paribas has categorically denied being in search of investors for a capital increase and reiterated the line of French banks that it can cope with the debt crisis in the euro area without injection of capital.
A source based in Qatar had told Reuters on Wednesday that the emirate was in talks with BNP and other French banks about possible equity participation.
BNP Paribas finished Thursday's session down 5.7%, while Credit Agricole dropped 9.49% and 9.57% Societe Generale, while the sector index of European banks plunged to 7.26%.