Europe pressed for action to end debt crisis

Global finance chiefs pressed Europe in weekend talks to quickly put in place the economic reforms needed to finally extinguish its debt crisis now that newly increased financial buffers have bought some precious time.

A day after advanced and emerging countries agreed to double the firepower of the International Monetary Fund to help contain the crisis, the IMF's governing panel said on Saturday that the 17-nation euro area must cut government debt burdens further, push bold economic reforms and stabilize financial systems.

Debt problems will resurface and growth will stumble unless these steps are taken, the head of the IMF's governing panel, Singapore's finance minister, Tharman Shanmugaratnam, warned.

An uneasy calm returned to world financial markets after the Greek crisis subsided but the IMF is concerned that without strong action fresh tensions will erupt, sapping global growth.

The IMF panel said all advanced economies needed plans to rein in deficits, but it singled out the euro zone as crucial to revitalizing strong growth.

The euro area, the world's second-largest economic bloc, already has slipped into a mild recession, weakening its major export partner China and other parts of emerging Asia, while growth in the United States remains sluggish.

Unless stronger growth is restored and investor confidence returns, the IMF and finance chiefs from around the globe said the world will not break out of a vicious debt-driven cycle.

What was really critical in all our minds was to get back to normal growth over the medium term and preferably sooner rather than later, in other words within two to three years, Tharman said at a news conference on Saturday.

If we don't get back to normal growth, if we don't get GDP back to its potential levels, then fiscal sustainability is not possible either, he warned.

The Group of 20 developed and emerging nations on Friday agreed to provide the IMF with a further $430 billion, more than doubling its lending power to erect a higher firewall in case the euro zone's debt crisis spreads. That complements a $1 trillion fire-fighting fund being assembled by Europe.

If the time that liquidity can buy is used to address the growth, solvency and institutional problems, fine, economists at Morgan Stanley wrote. They worried, however, that policy-making complacency might set in.

Political developments are clouding the picture. In France, a presidential election could bring to power Socialist Francois Hollande, who has vowed to renegotiate a German-inspired budget discipline treaty. Support for the pact is also waning in the Netherlands, where budget talks collapsed on Saturday.

FINGER POINTING

The United States piled the pressure on Europe to take advantage of its newly won breathing space.

The success of the next phase of the crisis response will hinge on Europe's willingness and ability, together with the European Central Bank, to apply its tools ... aggressively to support countries as they implement reforms, U.S. Treasury Secretary Timothy Geithner told the IMF's panel.

But in what participants said was an intense discussion, Germany pointed the finger back at the United States, the world's largest economy. U.S. fiscal troubles may reach the boiling point at year's end when expiring tax cuts and plans for deep budget cuts could throw the economy into recession.

Despite the need for action, a U.S. presidential election in November has resulted in political stalemate.

We understand the political constraints but there is no way around it and there is urgency, said German Finance Minister Wolfgang Schaeuble.

ROOM TO ACT

But it was Europe that the IMF panel singled out for policy advice. It stressed that budget consolidation must be balanced to avoid overly harsh cuts that undermine growth and make deficits even worse - a tricky act that Italy and Spain currently are facing.

There has been a big discussion about how to make it possible to have fiscal strengthening and growth, said Italy's deputy finance minister, Vittorio Grilli. While the timing matters, fiscal tightening must come first, he said.

The panel, made up of finance ministers who advise the IMF on policy, called upon major central banks to help by keeping interest rates low and monetary stimulus in place, as long as growth remains weak and inflation under control.

A call by the IMF for lower euro zone interest rates, however, met resistance from some ECB policymakers in Washington. Germany in particular is concerned that loose monetary policy will stir inflation, and argued it is no panacea for budgetary woes.

EMERGING MARKETS POWER

The IMF committee called on its members to ratify expeditiously a 2010 plan to increase representation of emerging economies on the IMF's executive board, reflecting their growing clout in the world economy. Brazil said this was an essential condition for it to provide the IMF funding.

But voting reforms are unlikely to get approved by the IMF's October meetings because of the highly partisan climate in Washington and the need for U.S. congressional approval.

I did not hear any clear announcement from the U.S. that they will be able to deliver, Schaeuble said.

Britain said its $15 billion contribution would only become available once the 2010 IMF reforms were completed.

(Additional reporting by Reuters IMF reporting team; Editing by Andrea Ricci)