Group
of 20 leaders focused their response to Europe’s financial crisis on stabilizing
the region’s banks, raising pressure on German Chancellor Angela Merkel to expand
rescue measures as contagion engulfed Spain.
As
U.S. President Barack Obama
called after-dinner talks with euro-area leaders at the G-20 summit in Mexico,
the Treasury department’s top international negotiator, Lael Brainard, said Europe is making an effort to
“break the feedback loop” between banks and government debt, the link that is
worsening Spain’s woes.
G-20
chiefs met as Spain’s borrowing costs soared to a euro-era record and elections
in Greece failed to damp the threat of contagion. Merkel, who heads Europe’s largest economy
and rejects pooling euro-area debt or boosting deficit spending, said she’ll
defend her policies with “good arguments” as world leaders press Europe to
stamp out the debt crisis now in its third year. Obama has blamed the turmoil
for slowing U.S. employment growth.
The
euro-area’s G-20 governments will commit to protecting the currency union,
according to an excerpt of a draft of the statement that leaders will issue at
the summit’s close.
Euro-area
members of the G-20 “will take all necessary policy measures to safeguard the
integrity and stability of the area, improve financial markets and break the
feedback loop between sovereigns and banks,” according to the draft provided by
an official from a G-20 government who declined to be identified because the statement
is not yet public.
The
G-20 nations are committed to moving “rapidly” toward market-determined
exchange-rate systems that are flexible to“reflect
underlying fundamentals,” Reuters reported, citing a separate draft of the
statement. Leaders welcomed China’s moves to increase transparency of its
exchange-rate policy and pledged to avoid “persistent misalignments,” and
“persistent devaluation of currencies,” it said.
With
European Union leaders preparing to discuss paths to closer political and
economic union at a summit in Brussels on June 28-29, Merkel has distanced
herself from aspects of the EU’s proposal for a banking union. She said last
week that steps such as jointly insuring deposits and joint euro-area bonds
can’t replace budget discipline and raising competitiveness across the euro
area.
As
part of the crisis toolkit, the world’s largest emerging economies announced
contributions to the International Monetary Fund’s financial firewall at the
meeting, with $10 billion pledges each from Russia and India. President Hu Jintao told leaders at
the summit China will contribute $43 billion to the backstop, which the IMF
said in April would total $430 billion, an official from a G-20 nation said on
condition of anonymity because the government hasn’t yet announced the amount
publicly.
The
euro extended declines as Spanish 10-year bond yields leapt above the 7 percent level that forced Greece, Ireland and Portugal to call for
outside aid. That stoked speculation Spain may need to request a sovereign
bailout after the government called for as much as 100 billion euros ($126
billion) to shore up its blighted banks.
The
European
Central Bank can stop the debt crisis in the 17-nation euro region
“almost immediately” with “massive”government-bond
purchases, Guillermo
Ortiz, the chairman of Grupo Financiero Banorte SAB and
Mexico’s former central bank governor, said in an interview in Los Cabos. The ECB “has done quite a bit,” Ortiz said. “The
problem is it needs to do more.”
G-20
leaders are in Los Cabos for their second consecutive
summit to be dominated by the crisis. Spain’s Prime MinisterMariano Rajoy is also
attending the talks, as the respite in markets after a victory for the
pro-bailout New Democracy party in Greek elections on June 17 proved
short-lived.
Merkel damped speculation that the
terms of Greece’s bailout might be relaxed.