G20 tells euro zone to fix debt crisis within weeks

The world's leading economies kept pressure firmly on Europe to sort out its debt crisis on Saturday with the sense of urgency to be reflected in a communique at the end of a G20 finance chiefs' meeting.

The make or break moment in the two-year-old crisis that has spread far beyond starting point Greece could come at a summit of EU leaders on October 23. Germany and France have promised to set out a plan to stop contagion, protect Europe's banks and the wider world economy.

We have heard from euro zone colleagues the action they are working on but I think they will have left Paris under no misunderstanding that there is a huge amount of pressure on them to deliver a solution to the crisis, British finance minister George Osborne told reporters.

(The crisis) remains the epicenter of the world's current economic problems. And the European Council is clearly the moment when people are expecting something quite impressive.

The draft communique, which must still be signed off by G20 finance ministers and central bankers, looks forward to further work to maximize the impact of the EFSF (bailout fund) in order to address contagion and to the outcome of the European Council on October 23 -- unusually direct language for G20 diplomats.

Efforts by some countries to increase the IMF's warchest to fight the crisis ran into resistance from the United States and others on Friday, burying the idea for now and putting the onus firmly back on Europe.

The United States is among countries keen to keep pressure on the Europeans to act more decisively to end the crisis that began in Greece but has since spread to Ireland and Portugal and is lapping at Spain and Italy.

As the G20 finance ministers and central bankers met in Paris, small groups of anti-capitalist protesters took to the streets around the world, shouting their rage against bankers and politicians accused of ruining economies and condemning millions to hardship through greed and bad government.

RESISTANCE FROM BANKS

Germany and France are trying to put flesh on the bones of a crisis resolution plan in time for the EU summit.

It will involve plans to recapitalize banks, make Greek's debt mountain more sustainable and ramp up the firepower of the bloc's rescue fund. For once in the long-running crisis, the timetable is ambitious.

There were growing signs that Greece's creditor banks would fight any attempt to make them shoulder a bigger burden in restructuring Greece's debts. The lead negotiator of the banking lobby representing private bondholders said there were no grounds to impose bigger voluntary losses on their debt than the 21 percent agreed in July, which looks insufficient.

We do not see that a compelling case has been made to reopen the (July) deal. A deal is a deal, Charles Dallara, managing director of the Institute of International Finance (IIF) told the Financial Times.

If the EU went back on its word, investors could sell other states' debt and destabilize the single currency, he said.

European Central Bank policymaker Juergen Stark, who has resigned in protest at the handling of the euro zone crisis, warned Europe risked damaging its standing among investors.

Governments should honor their obligations, he told Dutch newspaper NRC Handelsblad. This makes Europe look like a very risky region to invest in.

The plan will also set a framework for recapitalizing banks and for leveraging the euro zone's 440 billion euros European Financial Stability Facility to stabilize bond markets.

While the EFSF has the resources to cope with bailouts for Greece, Portugal and Ireland, it would be overwhelmed by the need to rescue a bigger economy such as Italy or Spain.

The most likely option will be to offer partial loss insurance on new sovereign bond issues.

If the EFSF covered the first 20 percent of losses a bank could suffer in case of a default -- it could multiply its firepower fivefold to over 2 trillion euros.

The draft communique said the G20 would ensure that banks are adequately capitalized and have sufficient access to funding. Central banks have recently taken decisive actions to this end and will continue to stand ready to provide liquidity to banks as required.

Fears about the damage a default by Greece -- and possibly others -- could inflict on the financial system have driven a confidence-sapping bout of market volatility since late July, with global stocks falling 17 percent from their 2011 high in May.

But they have picked up since the leaders of France and Germany set themselves an end-October deadline for action.

NO CHANGE ON YUAN, FOREX LANGUAGE

The G20, which makes up 85 percent of global output, is less united today than at the height of the financial crisis in 2009 when it launched coordinated stimulus to pull the world out of recession.

The rest of the world is now chafing at Europe's slow response while Washington and Beijing are sparring over the yuan currency.

Chinese Premier Wen Jiabao rebuffed U.S. pressure to let the yuan appreciate, assuring exporters at the Canton Fair in Guangzhou that China's exchange rate would remain basically stable to protect them.

The draft G20 communique contained language on exchange rates that was no harsher than at their last meeting in Washington. Ministers agreed that advanced economies would cut deficits while emerging economies would continue their move toward greater exchange rate flexibility and boost domestic consumption.

Advanced economies, taking into account different international circumstances, will adopt policies to build confidence and support growth and implement clear, credible, specific measures to achieve fiscal consolidation, the draft said.

Surplus emerging market economies will accelerate the implementation of structural reforms to rebalance demand toward more domestic consumption, supported by continued efforts to move toward more market-determined exchange rate systems and achieve greater exchange rate flexibility to reflect economic fundamentals.

G20 sources said China gave no indication it was prepared to change pace on greater flexibility of its yuan currency but would commit to boost consumption through a five-year plan, via households and companies as well as infrastructure.

French President Nicolas Sarkozy wants progress on bigger goals such as setting parameters to measure global imbalances and reining in speculative capital flows at a November 3-4 summit in Cannes, where France passes the G20 baton to Mexico.

A finance ministry source said France hoped to have two or three measures agreed by then for countries showing imbalances: consolidation measures for those with high deficits and stimulus measures for those with surpluses.

A communique and round of closing news conferences are expected around 1500 GMT.

(Additional reporting by Daniel Flynn, Francesca Landini, Randall Palmer, Gernot Heller, Glenn Sommerville, Kevin Yao, Abhijit Negoy; Writing by Janet McBride/Mike Peacock/Paul Taylor)