OECD warns on Europe's economy

7:50 AM economy, Europes, warns No Comments

PARIS — The Organization for Economic Cooperation and Development is warning of a "marked slowdown" in eurozone economies next year and says the European Union needs to clarify its anti-crisis measures.

In an update Monday of economic forecasts timed to coincide with this week's meeting of the Group of 20 major economies, the OECD says "patches of mild negative growth" are likely in the eurozone in 2012.

It says economic growth in the eurozone will stall at 0.3 percent next year, after just 1.6 percent growth this year.

The Paris-based OECD says "detailed information is needed" on how the EU will implement the package of measures announced last week aimed at resolving the European debt crisis, to prevent a repeat of the global crisis that hammered economies three years ago.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Europe's leaders scramble to avert crisis

9:23 AM avert, crisis, Europes, leaders, scramble No Comments

Buddy can you spare a euro? France's President Nicolas Sarkozy, speaking at the Conservative European People's Party (EPP) congress in Marseille, warns that Europe's economy is facing huge risks.

By John W. Schoen, Senior Producer

As Europe's leaders gather for what some believe may be their last chance to preserve the continent's  monetary union, European central bankers slashed interest rates Thursday to ease a credit crunch that has sparked a euro zone recession.

Despite talk of bold new measures to tighten controls over members' spending and debt, though, there appears to be little chance that the eighth crisis summit this year, set to begin in Brussels late Thursday, will resolve the deep political divisions that have brought Europe to the brink of financial collapse. 

Just hours before leaders of the 17 nations joined by a common currency convene the summit, French President Nicolas Sarkozy echoed what many observers have been saying in the weeks leading up to the meeting.

"Never has the risk of Europe exploding been so big," he told a gathering of European Union leaders. "The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence. If there is no deal on Friday, there will be no second chance."

The current quandary has been building for more than a year, as have fears that one or more Europe’s most heavily debt-laden governments will default. Despite three bailouts, a cobbled patchwork of backstop funds, and multiple failed summits and proposed solutions, the crisis continues to envelop the European financial system and economy.

Investors are demanding ever–higher interest rates on government bonds to offset the risk they wont get their money back. European bankers are having a harder time raising capital, even as regulators have ordered them to build up bigger cash reserves. That’s made it harder, and more costly, for European businesses and consumers to borrow money.

The European Central Bank tried to douse the flames Thursday by cutting interest rates a quarter point to a record low one percent. But at a news conference following the rate cut announcement, ECB President Mario Draghi dashed hopes that the move signaled the opening round of a wider effort to to ease rising market pressure on interest rates with massive bond purchases.

Draghi's comments sent financial markets lower and further eroded confidence that Friday’s meeting will generate a meaningful solution to the crisis.

"One step forward, two steps back," said Alan Clarke, U.K. and euro zone economist at Scotia Capital. "The euro zone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping."

The latest plan being floated by Sarkozy and German Chancellor Angela Merkel would create a mechanism for automatic penalties on countries that don’t meet budget deficit targets. Euro zone countries would also be forced to include a balanced budget requirement in their constitutions.

Even if the 17 leaders agree to such a plan on Friday, it remains to be seen whether voters in member countries will go along.

Proposals for tough budget-balancing measures have been warmly received by investors. But they have generated violent protests in countries such as Greece that have enacted them. Deep spending cuts have also accelerated the euro zone's economic contraction. 

No matter what measures those leaders agree to, they will have little long-term impact without popular support.

“Because of the bumps in the road that will inevitably occur along the way, it will be too easy for politicians down the road, when it's not Merkel or Sarkozy, to blame it on the people who agreed to it at the time,” said  Steve Crawford, an investment banker with Centerview Partners. “I think some democratic process needs to occur because of the consequences that are likely to happen down the road.”

That process will take time, something many investors believe Europe has run out of. 

European voters, meanwhile, remain deeply divided over how to get the continent back on a sound financial footing. French voters are loathe to dilute their national independence by turning over control of budgetary decisions to a central European agency with the veto power over spending decisions. With a presidential election looming, Sarkozy faces rivals who are warning voters that he wants to sacrifice French sovereignty to unelected EU officials.

German voters, on the other hand, are opposed to any measure that would divert their taxes to the cause of bailing out weaker, free-spending countries. Merkel has also steadfastly opposed calls for the ECB to print euros to underwrite massive bond purchases; that’s largely due to the German public’s deep-seated fears of a recurrence of hyperinflation that sank the Weimar Republic in the 1920s. 

The Fast Money traders take a look at Mario Draghi's comments impacting stocks today and await former MF Global CEO Jon Corzine's testimony.

Consumer and business confidence has been sapped by the crisis, tipping the euro zone into a mild recession that threatens to deepen the longer leaders fail to arrive at a solution.

The ECB’s official forecast calls for euro zone gross domestic product to shrink by as much as a full percentage point next year. Some private forecasters, including IHS Global Insight’s chief European economist Howard Archer, think that assessment may not be pessimistic enough.

The ECB's rate cut follows a concerted move on Nov. 30 by central banks areound the world to supply the global capital markets with more cash and avert a wider credit crunch. The Federal Reserve has been working to put out the fire with a series of so-called “swap lines” that supply the ECB with dollars, which it then lends to European banks in exchange for dollar-denominated bonds. As other sources of dollar funding have dried up, European bankers have leaned heavily on those swaps, borrowing $50 billion this week. That’s up from $500 million in November.

Bond rating agency Standard & Poor's put more pressure on European leaders to solve the debt crisis by threatening to downgrade its risk assessment for all 17 countries that use the euro.  The warning Wednesday includes the European Union itself, along with large euro zone banks.

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Europe's plan: Bold new steps, same old issues

5:24 AM Europes, issues, steps No Comments

  John Schults / Reuters

The future of the eurozone depends heavily on the efforts of French President Nicolas Sarkozy and German Chancellor Angela Merkel. But despite their single nickname of "Merkozy," the Franco-German duo has yet to produce a master plan.

By John W. Schoen, Senior Producer

The latest plan to save the euro zone calls for the boldest moves yet since the crisis exploded on the Continent this year. Yet despite a looming threat of failure, Europe's leaders and citizens remain deeply split over the same issues that that have doomed a series of failed proposals over the past two years. 

The new plan calls for a treaty that would fix one of the most critical, longstanding flaws in Europe’s monetary union: the lack of centralized control over member countries' decisions about taxes and spending. The absence of those controls have allowed free-spending nations like Greece and Italy to run up massive national debts that larger countries, like France and Germany, have refused to backstop.

The new treaty, which would require approval of all 17 countries that use the euro, would include automatic sanctions for countries that fail to keep government deficits in check.

For now, the proposal has given European bankers and political leaders some breathing room, as investors gave the idea a vote of confidence. Following the announcement Monday, the euro rose against the dollar, stocks gained and yields on European government bonds dropped.

“The fiscal stick is being rewarded by the market carrot,” said Douglas Borthwick, a currency trader with Faros Trading. “We continue to expect this going forward. The market rewards fiscal responsibility.”

But markets have rallied before on hopeful pronouncements from the leaders of Europe's "core countries”  only to see proposals dead-ended by the complex political process of forging consensus among 17 countries. In general European  voters tend to be leery of ceding their national independence to a centralized spending authority in Brussels. European leaders are scheduled to consider the latest proposals at a summit in Brussels Friday.

After U.S. markets closed Monday, Standard & Poor's warned that it may carry out an unprecedented mass downgrade of eurozone countries if EU leaders fail to reach agreement at the summit. The ratings agency placed the ratings of 15 euro zone countries, including top-rated nations Germany and France, on credit watch negative -- a move that signals a possible downgrade in no later than three months.

As with past failed proposals, the latest announcement came from French President Nicolas Sarkozy and German Chancellor Angela Merkel, the two strongest “core” economies that are struggling to stem the contagion from the weaker, heavily indebted peripheral economies of Greece, Italy, Spain, Portugal and Ireland.

Despite that common interest, the two countries remain divided over key elements of any bailout plan.

“There are still significant differences between Sarkozy and Merkel, so we're in for a volatile week,” said Patrice Perois, a trader at Kepler Capital Markets. “The risk is that any kind of disappointment could trigger a (market) pull-back."

France has long opposed efforts to dilute its national independence by turning over control of budgetary decisions to a central European agency with the power to veto spending decisions. Various enforcement mechanisms have been considered, including granting the European Court of Justice the power to punish governments that defy centrally imposed spending limits. Just months away from a presidential election, Sarkozy faces rivals warning voters that he is prepared to sacrifice French sovereignty to unelected EU officials.

For their part, German voters are loathe to allow their taxes to be spent bailing out weaker, free-spending countries. Faced with German voters' deep-seated fears of a recurrence of 1920s hyperinflation that sank the Weimar Republic, Merkel has also staunchly opposed the idea of letting the European Central Bank print euros to underwrite massive bond purchases,  

The long-simmering crisis reached a boiling point in the past few weeks as investors became increasingly skeptical about a series of broken promises to get Europe’s fiscal house in order. Those investors have demand higher interest rates on European government debt to offset the risk they won’t get their money back.

The euro is holding firm against the dollar, boosted by optimism on Italian austerity measures and the Merkel-Sarkozy meeting, with Marc Chandler, Brown Brothers Harriman.

Europe’s weaker countries, including Greece, Portugal and Spain, have been paying that premium for months as budget-balancing spending cuts sapped economic growth and cut into revenues, which forced deeper cuts in a downward economic spiral.  European leaders have assembled a collection of war chests to bail out those countries if they reach the end of their fiscal rope.

The crisis entered a new phase last month, when the rate on Italian bonds soared to 8 percent, a level widely acknowledged as unsustainable. With the third-largest pool of debt, behind the U.S. and Japan, Italy’s debt load is far too big to bail out. Various proposals to find bigger pools of bailout funding, including a proposal that the European Central Bank simply print more euros, have run into political, technical and legal roadblocks.

The latest round of proposals also includes a bid to raise Europe’s member country contributions to the International Monetary Fund, which would expand its financial firepower to backstop a debt default. The IMF so far has failed to attract larger contributions from countries outside Europe, including the U.S., China and Brazil.

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OECD warns on Europe's economy

1:44 AM economy, Europes, warns No Comments

PARIS — The Organization for Economic Cooperation and Development is warning of a "marked slowdown" in eurozone economies next year and says the European Union needs to clarify its anti-crisis measures.

In an update Monday of economic forecasts timed to coincide with this week's meeting of the Group of 20 major economies, the OECD says "patches of mild negative growth" are likely in the eurozone in 2012.

It says economic growth in the eurozone will stall at 0.3 percent next year, after just 1.6 percent growth this year.

The Paris-based OECD says "detailed information is needed" on how the EU will implement the package of measures announced last week aimed at resolving the European debt crisis, to prevent a repeat of the global crisis that hammered economies three years ago.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Europe's deepening crisis threatens US economy

3:36 AM crisis, deepening, economy, Europes, threatens No Comments

By John W. Schoen, Senior Producer

With the Greek government on the verge of collapse, Italy facing doubts about its massive debt, the leaders of the industrialized world met in France to try to stop the financial crisis playing out there from spreading around the globe.

Their options are extremely limited. If the crisis isn't contained, the shocks will be felt more painfully in the U.S.

"The European debt crisis is the single biggest threat to the U.S. recovery and the global recovery," said IHS Global Insight chief economist Nariman Behravesh. "The situation in Europe could spin out of control, as we've certainly seen in the last couple of days. And that could take the U.S. down with it."

Nearly two years after the it began,the crisis is already forcing Europe's economy back into recession, according to European Central Bank President Mario Draghi.

“What we are observing now is slow growth, heading towards a mild recession by year end,” he told reporters in Frankfurt Thursday, on the first day of his new job.

The fate of the European and U.S. economies are linked through multiple ties. The trade relationship is "the largest and most complex in the world," amounting to about $3.8 billion day and generating more than 7 million jobs, according to the Office of the U.S. Trade Representative. Slowing consumer and business spending in Europe means slowing demand for U.S. products and services.

The impact of a deeper European recession would be quickly felt on large U.S. companies that have been reporting strong profits overseas despite a sluggish recovery at home. That could force renewed belt-tightening, prompt layoffs and send the unemployment rate higher. 

Hey middle class, tell us about yourselves

To blunt the impact of that downturn, the ECB cut interest rates Thursday - by a quarter point to 1.25 percent - as the crisis widened. Greek officials Thursday scrambled to head off a proposed referendum that could force a withdrawal from the Euro and threaten the viability of the common currency. Deep budget cuts and a mass layoff of government workers have sent the Greek economy sharply in reverse. Though France and Germany are demanding further cuts before extending aid to Athens, Greek leaders counter that further cuts are politically untenable.  

Other heavily indebted European countries are drifting closer to that economic abyss. On Wednesday, Italy missed a critical deadline to come up with a plan to cut its budget deficit and revive growth. Spain, Portugal and Ireland are wrestling with proposals for similar measures to ease those countries' heavy debt burdens. 

Toon-Off: The Greek debt crisis 

As Europe's leaders have proposed, and shelved, multiple solutions in recent months, some observers believe that European leaders have not yet come to terms with the scope of the debt crisis. The latest includes a proposal that holders of Greek debt "voluntarily" agree to see the value of those bonds cut in half. But some observers say the measures proposed so far don't go nearly far enough.

"The Europeans have to come to grips with reality," said former Federal Reserve governor and Columbia University economist Frederic Mishkin.

Mishkin believes that means European leaders need to prepare for a much bigger writedown of Greek debt, along with the larger losses that would inflict on European banks holding those bonds. But it's not clear that European bank regulators have taken the steps needed to make sure the financial system there can withstand those losses.

"This has always been the issue," said Mishkin. "The good news is that the denial phase is starting to go away, and that's critical to finding a successful solution here. Although it's going to be damn difficult to do so."

The threats to Europe's financial system have already rocked U.S. financial markets and sapped American business and consumer confidence. But a wider meltdown could spread rapidly across the Atlantic.  

One "transmission mechanism" would be the impact on the U.S. dollar, which remains a safe haven for global investors in times of crisis. Demand for dollar-based assets drives up the value of the currency, imposing a penalty on U.S. exporters.

While U.S. banks and financial institutions are believed to be relatively well insulated from direct default of Greek and other European debt, less is known about the holders of default insurance on those bonds, so-called credit default swaps.

The proposed "voluntary" Greek bond writedown is an effort to avoid an actual default, an event that would trigger billions of dollars worth of swap payments. The fear is that a cascade of losses from issuers of default insurance could spread quickly through the global financial system, much as the collapse of Lehman Brothers sparked the financial meltdown of 2008.

European central bankers have resisted the kind of massive bond buying programs that the U.S. Federal Reserve undertook to calm the financial waters after the Panic of 2008. Thursday's rate cut signaled that Draghi could bring a more aggressive response to the crisis. But some observers see the move as too little, too late.

"Draghi made clear that the Bank will not buy enough bonds to provide the 'firewall' that markets hope might stem the region’s crisis," said  Jennifer McKeown, an economist for Capital Economics. "For now then, the euro zone’s fate will remain in the hands of the region’s governments, who appear increasingly unable or unwilling to respond."

As the crisis unfolded Thursday, leaders of the Group of 20 largest economies were arriving in Cannes, France for a regularly scheduled meeting. The agenda will include the search for solutions to the nearly two-year-old crisis.

But President Barack Obama and the U.S. delegation will have little new to offer. As Fed chairman Ben Bernanke told reporters Wednesday, Europe's problems can only be solved by Europe's leaders.

"It is a bit frustrating. ... ultimately it's their responsibility to find solutions to this very difficult problem," he said. "Of course, I and Treasury Secretary (Tim Geithner) and other economic policymakers in the United States do confer and meet with European policymakers on a regular basis and we give our advice, for what it's worth.  Sometimes they take it.  Sometimes they don't.  But obviously, they're the ones who have to make those decisions."

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As crisis widens, Europe's leaders keep talking

4:26 PM crisis, Europes, leaders, talking, widens No Comments

Getty Images

French President Nicolas Sarkozy and German Chancellor Angela Merkel met over the weekend and told reporters Monday they had worked out yet another plan to contain the widening financial crisis sweeping the continent. But they deflected questions about the plan's details.

By John W. Schoen, Senior Producer

More than a year after European officials began squabbling over solutions — and the continent's worst financial crisis since World War II has begun to engulf the banking system — the talking continues.

On Monday, Dexia, an embattled Franco-Belgian bank, became the first victim of the credit squeeze battering European lenders. European leaders moved to save the bank as the leaders of France and Germany emerged from yet another weekend of "emergency talks" on a coordinated plan to backstop European lenders.

“We are determined to do everything necessary to ensure the recapitalization of Europe’s banks,” Chancellor Angela Merkel said in Berlin after meeting with President Nicolas Sarkozy of France.

But the two leaders provided no details, leaving investors with little confidence that the plan will work.

"Now we have a plan to have a plan for recapitalization," said Steen Jakobsen, chief investment officer at Saxo Bank, a Danish investment bank. "We so many have plans for plans that I'm getting confused."

Though solutions remain murky, the problems facing Europe were brought into sharper focus by Dexia's failure. With no unified backstop in place, France and Belgium stepped in with $120 billion in loan guarantees for Dexia, which was taken over by the Belgian government.

As the crisis spreads, it's unclear how many more banks are at risk of being swamped by losses on holdings of government bonds issued by heavily indebted countries like Greece.

Now, as individual governments are forced to backstop their banks, the debt issued by those countries is being called into question. Moody's warned on Monday that it was reviewing Belgium's credit rating for a possible downgrade.

The risk is that Europe's governments find themselves caught in a vicious cycle. As Europe slides into recession, banks holding government bonds face losses if those bonds default. But without a coordinated plan to backstop failing banks, the burden will fall to individual governments. That cost of bank bailouts would further strain those government's budgets, increasing the risk of default.

"The governments that have problems with sovereign debt are recapitalizing banks that have problems with sovereign debt," said Adrian Schmidt, an investment strategist at Lloyds Bank. "It's getting somewhat circular."

Merkel and Sarkozy said Monday they would finalize the plan to backstop Europe's banks by the end of the month. But they offered no details, including the possible price tag for a unified program to provide more cash to the banking system.

There's widespread agreement that Europe's banks need more capital to weather the ongoing financial crisis. But there's little consensus over just how much they need. The problem is compounded by the steep drop in the price of Europe's bank stocks, which has made it harder for them to sell stock to raise cash.

The hope is that government pledges to backstop failing banks will help calm investors and provide bankers with more sources of private funding. But investors remain leery.

"I do not think being guaranteed by governments is any guarantee these days," said Jakobsen.

The announcement from Sarkozy and Merkel that a plan was near follows multiple failed attempts at a coordinated solution. Those have included a European version of the U.S. Troubled Asset Relief Program launched in 2009 to bail out American banks. Last year, European leaders cobbled together a so-called "financial stability facility," but that fund is now widely seen as too small to cover potential losses.

"We've been talking about Europe and potential solutions for months," said Scott Nations, President of NationsShares. "First it was leveraging the stability facility. And then they were going to do euro TARP. They're not coming to any conclusions or any solutions."

It remains to be seen how the latest plan will resolve the underlying threat of a debt default by Greece and other weaker economies. As the crisis has widened, the European Union's 17 member governments have remained split over a basic question: who should foot the bill?

Europe's leaders are running out of time to resolve that long-simmering debate. Over the weekend, Greek officials wrapped up the latest round of talks on the next $11 billion installment of an aid package needed to stave off a debt default. Without the payment, Athens is expected to run out of cash in the next few weeks. The latest round of proposals may be Greece's last chance to head off the financial collapse that has been looming for over a year.

But for now, the talking continues. On Monday, the EU announced that its next regular summit would be postponed by six days to Oct. 23 to allow time "to finalize our comprehensive strategy on the euro area sovereign debt crisis", according to European Council President Herman Van Rompuy.

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Europe's economic medicine is killing the patient

10:31 AM economic, Europes, killing, medicine, patient No Comments

Riot policemen try to avoid an exploding petrol bomb thrown by protesters during a demonstration in Athens' Syntagma (Constitution) square October 5, 2011. Police fired tear gas at stone-throwing youths in central Athens, where thousands of striking state sector workers marched against cuts the government says are needed to save the nation from bankruptcy.

By John W. Schoen, Senior Producer

The medicine being used to cure the financial contagion spreading throughout Europe is killing the patient.

For nearly two years, the richer countries of the region have pressed harder for spending cuts and tax hikes from poorer countries like Greece, already struggling under a crushing debt accumulated when the global economy was booming.

Those measures have sent the entire euro zone sliding into recession, pushing Greece’s neighbors closer to default and European banks that are holding that shaky debt closer to insolvency.

Now, after years of debate and multiple failed efforts, the downward spiral may be impossible to break. By not acting quickly, Europe may have missed its chance to cure the disease, according to Mohamed A. El-Erian, CEO of  PIMCO, one of the world's largest bond funds.

“You have an infection,” he said. “You leave it alone. You don't treat it. You diagnose it badly. Guess what? Even the strongest parts of the body will get infected. That's what's happening in Europe today.”

Since July, European Union leaders have been working out details of a broad plan to force tax increases and budget cuts on Greece in return for the latest $11 billion payment that would head off the country defaulting on its debt. Without that aid, Athens is expected to run out of cash in a few weeks.

Greek officials said this week that they would not meet the targets imposed as part of the deal, throwing the entire bailout plan into doubt. While its European benefactors argue that Greece simply needs to try harder, austerity measures already have sent the country’s economy into a deep recession.

“The capacity of the Greek people to pay taxes is really, believe me, exhausted,” said Petros Doukas, a former Greek deputy finance minister. “People like myself are paying taxes out of our savings and by selling our assets. We’re not paying taxes by generating new income, unfortunately. And that’s a very, very dire development.”

Government spending in Greece now accounts for roughly 40 cents of every dollar of gross domestic product. That means that every fresh round of spending cuts pushes Greece deeper into recession, further sapping its capacity to repay its debt.

As a result, the disease is now spreading to the continent’s banks, which hold large chunks of European government debt on their books. As the threat of default rises, the value of those bonds falls. For a time, it appeared that Greece was the only country in trouble. But on Monday, credit rating agency Moody’s downgraded debt issued by Italy, the region’s third largest economy.

For over a year, European bank regulators have assured the financial markets that the banking system there was strong enough to withstand the spreading contagion. In the past few months, though, it’s become clear that Europe's bailout fund, cobbled together last year, is nowhere near large enough to backstop debt defaults and bank failures beyond Greece.

“From Day One, people knew this program would not deliver outcomes,” said El-Erian. “This was not about Greece. This was about keeping Greece somewhat stable in order to strengthen the fire walls.”

Now, those firewalls appear to have failed. On Tuesday, France and Belgium moved to bail out Dexia, Europe’s 20th-largest bank by assets. The bank was teetering on the brink of insolvency.   

Other European banks are also having trouble raising cash from investors, who worry that they may be the next to go belly up. They have reason for concern. On Wednesday, officials at the International Monetary Fund, a major player in the Greek bailout, repeated warnings that European banks don’t have enough capital to survive a credit squeeze. To compound that problem, European bank regulators this week suggested that bankers may need to take a bigger “haircut” on their debt holdings as the risk of bond default rises.

A year ago, raising capital by selling more stock would have been a relatively easy proposition. But in just the last eight months, European bank stocks have lost 40 percent of their value. Today, investors are much less willing to provide capital — in part because European bank financial statements are much more opaque than their American counterparts.

“At least with Morgan Stanley and Bank of America you can look at the balance sheet, look at the numbers, and have some sense that you know what you're looking at,” said Mark Grant, a managing director at Southwest Securities. “The problem with the European banks is you have no idea what you're looking at. They categorize things. They put things in drawers. They tell you, ‘Here’s the drawer’ and you have no idea what's in it.”

Sharing an update on the European protestors outside the Greek Capital today, with CNBC's Steve Sedgwick. Also, CNBC's Simon Hobbs, Michelle Caruso-Cabrera weigh in on whether a resolution to the European economic crisis is in sight.

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Europe's woes raise global recession risk

6:14 PM Europes, Global, raise, recession No Comments

AppId is over the quota AppId is over the quota By John W. Schoen, Senior Producer

As the European financial crisis threatens to drag the global economy back into recession, leaders from Washington to Beijing are calling for Eurozone leaders to intensify their efforts to contain the spreading contagion.

Treasury Secretary Timothy Geithner on Wednesday sought to calm growing fears that European debt defaults could spark a repeat of the Panic of 2008. But he called on Europe's leaders to move more quickly to resolve Europe's escalating debt crisis. 

"They recognize that they have been behind the curve. They recognize that it will take more force behind their commitments," Geithner told CNBC television.

Those remarks were echoed by leaders of the developing world, who fear that the deepening crisis threatens to stifle one of the world's largest markets for imported goods.

Chinese Premier Wen Jiabao said Wednesday that Beijing is willing to help its biggest trading partner, but added that European leaders must act on their own stop the crisis from growing.

"What we have to take note of now is to prevent the sovereign debt crises from spreading and expanding further," Wen said.

American businesses and consumers are already seeing the impact of Europe's failure to deal with its debt woes. Economic growth in Europe has slowed to a standstill, cutting into demand for American products by its largest single trading partner. The threat of a global recession brought on by European debt defaults has given American businesses one more reason not to hire more workers.

Once thought to be limited to the weaker economies on the continent, larger European economies like Italy and France are being dragged down by the lack of consensus among 17 eurozone governments. That political failure has intensified worries about the prospect of a financial solution.

"I think we're all staggered by the lack of concerted continuity between leaders in western Europe to deal with the problem," said Martin Sorrell, CEO of WPP, one of the world's largest advertising agencies.

After more than a year and a half of failed efforts, Greece is on the brink of defaulting on its debt. With its economy contracting, it has been unwilling or unable to cut spending fast enough to win support for a bailout from stronger countries like France and Germany. Leaders of those two countries were expected Wednesday to press Greek Prime Minister George Papandreou once more to enforce the harsh austerity measures.

There is fresh evidence that the debt crisis is spreading. On Tuesday, Moody's cut the credit ratings of two large French banks, Societe Generale and Credit Agricole, that hold large portfolios of Greek debt. A default by Greece would put a major strain on the banks’ ability to raise capital.

Italy, Europe's third-largest economy, is already having trouble selling bonds as investors see rising risk that it may eventually default on its 1.9 trillion euros in debt. On Tuesday, the Italian government had to pay those investors 5.6 percent interest to auction off its latest offering of 10-year bonds. The last time those rates hit 6 percent, European Central Bankers stepped in to buy Italian bonds to avert a wider panic

As investors grow increasingly skittish about Greece, they've begun pulling back from buying bonds issued by other European countries. Governments outside the continent are also weighing whether to expand their bond purchases to help avert a global crisis -- or step back until European leaders agree on a more credible solution to the crisis.

With foreign currency reserves of more than $3 trillion, China could play an important role as a buyer of last resort for debt issued by European countries such as Greece and Italy, whose bonds are being shunned by investors.

The Financial Times reported Monday that Italy had asked Beijing to buy "substantial quantities" of its debt. But an Italian ministerial source told Reuters that his government is discussing a Chinese investment in its industrial sector, not government bonds.

Brazilian president Dilma Rousseff said on Wednesday that her country is also ready to join any international effort to help stem the spread of Europe's financial crisis. Russia, another of the so-called BRIC developing countries, wants to see a clear strategy from Europe's leaders before it commits to buying more European bonds, President Dmitry Medvedev's chief economic adviser told Reuters Wednesday.

"We would like to know what actions will the European Union take itself, what scenario will they opt for: a default on Greek debt or no default? Whom will they help: banks or governments?" said Arkady Dvorkovich.

Russia, which is the world's third-largest holder of gold and foreign exchange reserves, already holds a sizeable portion of European debt. That could limit additional purchases.

The BRICS -- Brazil, Russia, India, China and South Africa -- are expected to discuss possible solutions to the Eurozone crisis next Thursday at meetings at the World Bank and International Monetary Fund in Washington. But for now, said one Greek official, they have not stepped up their Greek bond buying.

"We have invited all the (BRIC) countries to take an active part in covering the country's borrowing needs," said Greek Deputy Finance Minister Filippos Sachinidis. "Despite the invitation, we have found there was little or no participation at all."

Discussing whether there is a light at the end of the tunnel for Europe, with Louise Cooper, B.G.C. Partners market analyst and Keith McCullough, Hedgeye Risk CEO.

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US voices alarm over Europe's debt crisis

2:17 AM alarm, crisis, Europes, voices No Comments

AppId is over the quota AppId is over the quota The United States expressed concern on Tuesday about how Europe was handling its debt crisis even as German Chancellor Angel Merkel tried to suppress talk that Greece would default imminently.

Market confidence in the 17-nation currency area suffered another blow when Italy had to pay the highest yield since it joined the euro in 1999 to sell 5-year bonds. And the chief executive of carmaker Fiat warned that the euro system "could go off the rails" if EU leaders do not get a grip.

President Barack Obama told Spanish journalists in a group interview published on Tuesday that euro zone leaders needed to show markets they were taking responsibility for the debt crisis. Weakness in the global economy would persist so long as it is not resolved, he said.

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In a measure of growing alarm in Washington, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend.

Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy.

"In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy," the news agency EFE quoted him as saying.

Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.

Asked by RBB inforadio whether a Greek default would doom the euro, she answered: "We are using all the tools we have to prevent this. We need to avoid all disorderly processes with regards to the euro."

Calling Europe's challenge "historic", Merkel added that everything must be done to keep the euro zone intact "because we would see domino effects very quickly".

Merkel and French President Nicolas Sarkozy conferred by telephone on the crisis on Monday, a senior French government source told Reuters, but Sarkozy's office said there was no plan to issue a joint statement on Greece on Tuesday, which the source had said was coming. There was no immediate explanation.

Italy yields soar
Markets have already priced in the near certainty of a Greek debt default. Credit default swap prices suggest a 90 percent probability of default in the next five years, according to CDS pricing data provider Markit.

Greek TV said Prime Minister George Papandreou would hold a conference call with Merkel and Sarkozy on Wednesday. International inspectors are due to return to Athens to review deficit-cutting steps before deciding on the next tranche of aid.

Greece has said it only has a few weeks' cash and needs the 8 billion euro tranche in October to pay salaries and pensions.

Pressure on Italy mounted on Tuesday at a bond auction that showed the limits of European Central Bank efforts to hold down Rome's borrowing costs by buying government bonds in return for austerity measures to cut its budget deficit.

The five-year bond yield hit a euro lifetime high of 5.60 percent despite ECB purchases in the secondary market that led to the resignation of the central bank's German chief economist, Juergen Stark, last Friday.

"Markets want to see decisive action and they want to see someone in control of the situation," said Marc Ostwald, an analyst at Monument Securities in London.

"Nothing that we've had, be it at a domestic level in Italy, be it at a pan-euro zone level, or above all from Germany, indicates that anyone really is getting to grips with presenting euro zone policy with one voice," he said.

The CEO of Italian carmaker Fiat, Sergio Marchionne, asked at the Frankfurt car show whether the euro's survival was at risk, told reporters: "I think there is a possibility, if the wrong steps are taken, that the system goes off the rails."

Hopes that China might step in as a savior to buy Italian bonds, after an Italian request and recent talks, failed to provide much support for the auction.

Italian Economy Minister Giulio Tremonti met Chinese officials last week including the head of its sovereign wealth fund, a Treasury spokesman said, after the Financial Times reported that Rome had asked China to buy "significant" quantities of its bonds.

A Chinese Foreign Ministry spokesman said Beijing had confidence in Europe's ability to handle its debts, but sought assurances that Europe would ensure the safety of its investments in the region.

Wu Xiaoling, a former deputy governor of the People's Bank of China, told Reuters on Tuesday that investor "panic" about Europe's debt crisis was unnecessary, and China was ready to work with others to boost market confidence.

Chinese verbal support
Chinese leaders have repeatedly offered verbal support to Greece, Portugal and Spain but encouraging words have not so far been matched by spectacular action.

China held just over 7 percent of euro zone government bonds at the start of this year, according to an estimate published by the French business daily La Tribune and confirmed privately by a senior EU official as "in the ballpark".

Beijing has continued to buy European debt this year but traders say the volume has been modest and mostly in high-grade paper rather than bonds of the weaker peripheral countries.

French bank shares fell further on Tuesday after losing 10 percent on Monday due to market concern about their exposure to Greek and other peripheral EU debt.

Markets have been unsettled by growing talk among German politicians about the likelihood of a Greek default and a possible suspension of Greece from the single currency area.

In a note published on Tuesday, Citigroup chief economist Willem Buiter said a Greek exit from the euro zone would be a "financial and economic disaster" for both Athens and the remaining 16 members. Such a step would have severe economic and political implications for the broader EU and global economy.

"As soon as Greece has exited, we expect the markets will focus on the country or countries most likely to exit next from the euro area," Buiter said.

Merkel said the euro zone would only have a procedure for an orderly default in place from 2013, when a permanent crisis resolution mechanism is due to come into effect.

"In a currency union with 17 members, we can only have a stable euro if we prevent disorderly processes. Therefore it is our top priority to avoid an uncontrolled default, because it would hit not only Greece. The danger would be very high that it would hit many other countries," she said.

Obama's comments suggested that Washington is trying to nudge European governments towards closer fiscal union or a bigger bailout fund to recapitalise teetering banks but European politics, especially in Germany, make that difficult.

The German Constitutional Court last week appeared to rule out issuing common euro zone bonds unless Berlin amended its Basic Law and the EU adopted a new treaty.

Merkel suggested the way forward should involve sharper punishment for states that violate the bloc's budget discipline rules, which have been repeatedly breached in the last decade, including by central euro zone powers Germany and France.

"Until now, for example, if countries violate the Stability and Growth Pact they cannot be taken before the European Court of Justice," she said

© 2011 msnbc.com

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