Last updated: September 23, 2011 11:12 pm

Global economy pushed to the brink

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Time is running out to find a solution to the eurozone crisis and prevent another global recession, finance ministers warned on Friday, as they hinted that discussions were under way to boost the firepower of European rescue funds.

Financial markets experienced another day of intense volatility as investors struggled to interpret an emergency statement from the Group of 20 leading economies, which met on the sidelines of the International Monetary Fund and World Bank meetings in Washington.

Investors were initially unimpressed by the G20’s message of support for the global economy, but several said they did not want to get caught out should policymakers unexpectedly decide on a radical policy response.

Gold continued to slide sharply and US oil prices traded below $80 a barrel, their lowest in more than a year. Shares rallied modestly in Europe and the US, accompanied by selling in government bonds and the dollar.

Many finance ministers reported a greater sense of urgency in discussions on the eurozone overnight on Thursday.

“Patience is running out in the international community,” said George Osborne, UK chancellor of the exchequer. “The eurozone has six weeks to resolve this political crisis.”

Eurozone governments have pledged to pass legislation by mid-October to make their rescue fund, the European financial stability facility, more flexible and are discussing ways to “maximise its impact in order to address contagion”.

S&P 500 index

European Union officials are warming to the idea that the EFSF could be “leveraged” to increase its strength, perhaps by guaranteeing larger European Central Bank purchases of Spanish and Italian sovereign debt, in an effort to isolate the two countries from the more intractable Greek debt crisis. François Baroin, French finance minister, said policymakers “need the right firewall to prevent contagion” and can discuss giving the EFSF “the necessary strength”.

Jean Claude Trichet, ECB president, delivered a robust defence of Europe’s handling of the crisis without hinting at new action the ECB might take. “We are not blind and we are not hiding what we see in the present situation,” he said.

Investors are bracing themselves for more ECB action, possibly next week or in early October. JPMorgan analysts predicted the ECB would cut interest rates by 50 basis points at its October meeting, while members of the ECB’s governing council hinted they could reintroduce 12-month loans to eurozone banks.

“I am very confident they’re going to move in the direction of expanding (their) effective financial capacity,” added Tim Geithner, US Treasury secretary. “They’re just trying to figure out how to get there in a way that is politically attractive.”

Even as discussions focused on containing the crisis, German officials insisted on balancing talk of a beefed-up EFSF by lobbying for reduced government borrowing. Wolfgang Schäuble, German finance minister, said a rejection of further fiscal stimulus was “widely shared” in the G20.

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