G20 puts pressure on Angela Merkel

Group of 20 leaders focused their response to Europe's financial crisis on stabilising the region's banks, raising pressure on German Chancellor Angela Merkel to expand rescue measures as contagion engulfed Spain.

As United States President Barack Obama called after-dinner talks with euro-area leaders at the G20 summit in Mexico, the Treasury Department's top international negotiator, Lael Brainard, said Europe was making an effort to "break the feedback loop" between banks and government debt, the link that is worsening Spain's woes.

"We're seeing a notable shift in European discussion" towards spurring economic growth and "laying out a path to financial union", Brainard said as the two-day summit began yesterday at the resort of Los Cabos.

G20 chiefs met as Spain's borrowing costs soared to a euro-era record and elections in Greece failed to damp the threat of contagion.

Merkel, who heads Europe's largest economy and rejects pooling euro-area debt or boosting deficit spending, said she would defend her policies with "good arguments" as world leaders press Europe to stamp out the debt crisis now in its third year.

Obama has blamed the turmoil for slowing US employment growth.

The eurozone's G20 governments will commit themselves to protecting the currency union, according to an excerpt of a draft of the statement that leaders will issue at the summit's close.

Euro-area members of the G20 "will take all necessary policy measures to safeguard the integrity and stability of the area, improve financial markets and break the feedback loop between sovereigns and banks", according to the draft provided by an official from a G20 government who declined to be identified because the statement is not yet public. Leaders welcomed China's moves to increase transparency of its exchange-rate policy.

With European Union leaders preparing to discuss paths to closer political and economic union at a summit in Brussels on June 28-29, Merkel has distanced herself from aspects of the EU's proposal for a banking union.

She said last week that steps such as jointly insuring deposits and joint euro-area bonds could not replace budget discipline and raising competitiveness across the eurozone.

"It's not a complete beating up session, but Germany is the recipient of fairly caustic criticism from other members of the G20," said Rob Carnell, chief international economist at ING Bank NV in London.

"The pressure will be on Germany to give more ground and behind closed doors Merkel may well be more accommodative."

The world's largest emerging economies announced contributions to the International Monetary Fund's financial firewall at the meeting, with US$10 billion pledges each from Russia and India.

President Hu Jintao said China would contribute US$43 billion to the backstop, which the IMF said in April would total US$430 billion, an official from a G20 nation said on condition of anonymity because the government has not yet announced the amount publicly.

- Bloomberg