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EU given six weeks to protect itself against ‘inevitable Greek default’

IMF tells eurozone to address debt crisis once and for all amid mounting frustration over threat of double-dip recession

European Union 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% 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 International Monetary Fund 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 spiralling 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. The Washington-based lender believes the 18-month delay since Greece was first bailed out last spring has exacerbated the crisis.

Tim Geithner, the US treasury secretary, said: “The threat of cascading default, bank runs and catastrophic risk must be taken off the table, 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.”

The US and Britain believe that Europe needs to deploy massive firepower in order to prevent a domino effect from Greece bringing down the other vulnerable members of the eurozone such as Portugal, Italy and Spain.

However, ministers remain reluctant to admit publicly that a Greek default is inevitable. George Osborne said in Washington: “No one here has put forward a plan for that; Greece has got a programme and needs to implement it.”

A communique from the finance ministers and central bankers of the IMF’s member states, released after Saturday’s meetings, reiterated the need for urgent action from the eurozone and set a deadline of mid-October for reforming the bailout fund.

G20 sources said the meetings had ratcheted up the sense of alarm over the crisis, saying “there’s been a very visible shift in pace, mood and urgency”, but there was a sense of exasperation among non-eurozone members about the lack of concrete action.

A clearly exasperated Canadian finance minister, Jim Flaherty, told journalists: “We’ve been talking about Greece since January 2010.”

European ministers had to endure an ear-bending from their counterparts in the rest of the world this weekend. George Osborne used his statement to the IMF committee to press Europe to accelerate measures to transform the single currency into a fully fledged fiscal union. “The eurozone should follow the remorseless logic of monetary union through progress on institutional reform, greater fiscal integration and coordination of budget policies,” he said.

Ministers from the G20 group of major economies have called for an urgent ratification of the 21 July agreement, brokered by Angela Merkel and Nicolas Sarkozy, to beef up the powers of the EFSF. Osborne warned on Friday that Europe has just six weeks to resolve its political crisis.

Insiders say there is disarray among Europe’s leaders about the best way to contain the fallout from a Greek default. The European Central Bank would have to play a major role in any rescue package, but so far has intervened only reluctantly. Its president, Jean-Claude Trichet, has repeatedly insisted that a Greek default is unthinkable. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds