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The G20's Eurozone Problem

Author: Christopher Alessi
Updated: October 15, 2011

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G20 finance ministers and central bankers, meeting in Paris this weekend, issued a strongly worded communique imploring European leaders to "decisively address" (Reuters) the widening eurozone sovereign debt crisis before it wreaks further havoc on an already-strained global economy. The meeting comes just days after Slovakia (DeutscheWelle) became the final eurozone member to ratify the expansion of the temporary eurozone rescue fund--the European Financial Stability Facility (EFSF)--agreed on in conjunction with plans for a second Greek bailout by EU leaders in July.

Still, those measures are already criticized as insufficient to stem contagion to other indebted eurozone states and to the continent's banks. G20 ministers will be looking to their EU counterparts to present a more comprehensive plan to "ringfence" Greece, while organizing an orderly restructuring of its debt, and protecting Italy and Spain from sovereign default, Fredrik Erixon, director of the European Center for International Political Economy, told CFR. Credit rating agency Standard and Poor's downgraded Spanish debt (Telegraph) by one notch on Friday.

Government officials on both sides of the Atlantic have emphasized the high stakes of this weekend's meeting. A French official told Agence-France Presse on October 13 that the G20 must agree on how to stabilize the eurozone or face significant consequences to the world's economy in the coming months. Lael Brainard, undersecretary for foreign affairs at the U.S. Treasury Department (CNN), said on October 12 that the eurozone debt crisis "represents the most serious risk to the global recovery today." Brainard underscored that Treasury Secretary Timothy Geithner will urge his EU counterparts at the G20 to act forcefully.

But that may be all Geithner, or any other finance minister, can do. Experts do not anticipate a final roadmap for the eurozone to emerge from the G20 finance ministers gathering. EU officials will use the meeting to brief their non-European colleagues on their progress and solicit feedback, Domenico Lombardi, president of the Oxford Institute for Economic Policy told CFR. Eurozone leaders will then formally debate any proposals at the European Council summit on October 23. But a final outline on eurozone stability is unlikely until the G20 summit on November 3-4 in Cannes, Lombardi says.

EU leaders remain divided over how to assist Greece and how to shore up European banks. The next Ä8 billion tranche of last year's first Greek bailout is being held up as the EU and IMF determine whether Greece has met mandated austerity measures. Meanwhile, German and French officials have indicated that a second EU-IMF bailout for Greece may now force private holders of Greek debt to take losses in excess of 50 percent, significantly higher than the 21 percent rate negotiated in July. Such a move would amount to an orderly default. But the European Central Bank is opposed to any involuntary default or restructuring, orderly or otherwise.

European officials announced October 13 that the continent's banks will likely be given between three and six months to beef up their balance sheets (NYT)--the European Banking Authority is expected to recommend a 9 percent core capital target--but the mode of recapitalization is still to be determined. The United States, for example, has called on the EU to leverage the EFSF (AFP) to around Ä2.5 trillion. The facility would then be in a position to help strengthen banks unable to secure market financing.

More broadly, the G20 will need to decide soon what role the IMF should play in stabilizing the eurozone, and how the G20 nations could assist it. "The IMF doesn't have the financial capability to commit itself in a credible way to the eurozone crisis," Lombardi says. "Its major stake holders [G20 members] would have to provide additional lines of credit."

The decision to do so will be guided in large part by the level of progress that European leaders demonstrate this weekend.

Background Materials

"Bailouts or Bankruptcies?" Der Spiegel

"Eurozone Crisis Explained," BBC Timeline

"Waiting on the Eurozone," CFR Analysis Brief

"How to Save the Euro," Economist

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