Global leaders are resigned to a Greek default
US warns Europe to get crisis under control
A Greek default is now "virtually guaranteed" as a host of world political and financial leaders talked openly about such a prospect this weekend.
At this weekend's meeting of the G20 in Washington, there was an expectation that French banks were on the verge of receiving substantial recapitalisations, but the mechanism of how the money would be put in was the subject of "intense discussions".
European governments will spend the next six weeks putting together a firewall to protect their fragile banking systems against what is now seen as an inevitable Greek default. G20 sources said up to 50 per cent was likely to be wiped off the face value of Greece's €350bn debt -- but not until Europe had put into place a war chest to prevent the contagion spreading.
More money will be disbursed by the IMF and the EU next month to keep the Greek government afloat, but this is seen as a short-term fix while Europe's leaders beef up the eurozone bailout fund, the European Financial Stability Facility.
Europe came under ferocious pressure at this weekend's meeting of the IMF in Washington to contain the sovereign debt crisis, which is blamed for dragging the global economy to the brink of a double-dip recession.
The IMF is reportedly willing to continue bailing out Greece for the short-term, provided Europe uses the time to tackle the issue of debt once and for all.
Finance Minister Michael Noonan, who is in Washington, is using the meeting as an opportunity to continue to press Ireland's case and the need for greater flexibility under the terms of our bailout.
Speaking at the meeting, Central Bank Governor Patrick Honohan said: "If the pot of money put by governments on the table is to be leveraged, that is definitely a separate decision, especially if that leverage is to involve a central bank. We should not think of leveraging a public pot of funds as a free lunch."
At the G20, the US and China piled pressure on Europe to get to grips with its debt crisis before it risks causing bank runs and pushing the global economy into ruinous recession.
The US treasury chief, in his most explicit warning to date about the crisis, said it was time for the European Central Bank to step up and take a central role to get the problem under control.
HAS THE ECONOMIC TIDE TURNED? PAGES 28-31
US Treasury Secretary Timothy Geithner told European governments to eliminate the threat of a catastrophic financial crisis by teaming up with the ECB to boost the continent's bailout capacity.
Mr Geithner said fiscal authorities should work more closely with the ECB to ensure that eurozone governments with sound policies have access to affordable financing and to ensure that European banks have adequate capital and liquidity to weather the crisis. "The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally. Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe," he said.
The US Treasury chief has been lobbying for weeks for European officials to leverage their €440bn European Financial Stability Fund through the ECB to increase its capacity. His statement suggests that he wants Europe to employ the ECB's balance sheet in the same manner as the Federal Reserve did with Treasury capital during the 2008-09 financial crisis.
The US Treasury in 2008 pledged $20bn in capital to allow the Federal Reserve to lend $200bn to restart credit markets frozen by the financial crisis. Mr Geithner said that because inflation risks were largely less acute, some central banks had room to further ease policy, keep rates lower longer and slow the pace of expected tightening.