Bloomberg News

Europe Gets Emerging Market Crisis Ultimatum as G-20 Meet

June 18, 2012

Europe Gets Emerging Market Crisis Ultimatum as G-20 Meet

A Caja Madrid bank branch, part of the Bankia group, was vandalized during a protest against Spanish banks in Madrid on June 16, 2012. Spain's bond yields surged the most since the euro was created in 1999 this week after the nation requested aid for its banks and asked the European Central Bank for more financial support. Photographer: Angel Navarrete/Bloomberg

Europe’s financial crisis deepened and enveloped Spain, raising pressure on German Chancellor Angela Merkel at a meeting of world leaders to shift her stance on shielding the global economy.

Group of 20 chiefs are meeting at a two-day summit in Mexico today as Spanish borrowing costs soared to a euro-era record. With elections in Greece failing to damp the threat of contagion, policy makers are deliberating ways to stimulate the world economy if necessary, a Canadian official said. Merkel, who last week criticized U.S. debt levels, said June 15 she’ll press the G-20 to hold to prudent government spending.

“It’s not a complete beating up session, but Germany is the recipient of fairly caustic criticism from other members of the G-20,” Rob Carnell, chief international economist at ING Bank NV in London, said by telephone. “The pressure will be on Germany to give more ground and behind closed doors Merkel may well be more accommodative. There is ground for the euro zone to move, but just what it does depends on how much Germany digs its heels in.”

G-20 leaders are gathering in the Mexican Pacific resort of Los Cabos for a summit being dominated by the crisis in the 17- nation euro region that threatens to further erode the weakest global economy since the 2009 recession. Spain’s Prime Minister Mariano Rajoy is also attending, as the respite in markets after elections in Greece yesterday proved short-lived.

Euro Drops

Stocks erased their gains and the euro fell today as Spanish 10-year bond yields leaped above the 7 percent level that forced Greece, Ireland and Portugal to call for sovereign rescues for the first time since the euro’s creation.

G-20 officials met late into the night to discuss a mix of measures to secure the global recovery including deficit reduction for some countries and pledges for additional stimulus by others with sounder finances, the Canadian official said on condition of anonymity because the negotiations are private. Canada was pushing for language in the communique that would call on European nations to take strong action, the official said.

President Barack Obama, who has blamed the crisis “cloud” coming in over the Atlantic for a slowdown in U.S. employment growth, is due to hold talks with Merkel in Los Cabos today at 1:30 p.m. local time, a White House official said.

‘Getting Closer’

“I think we are getting closer to a common position,” Italian Prime Minister Mario Monti told reporters late yesterday upon his arrival in Los Cabos. Growth will be an “important theme” at the summit.

The euro dropped 0.4 percent to $1.2593 as of 3:59 p.m. in Berlin, while the Stoxx Europe 600 Index was little changed after earlier rallying 1.1 percent. The 10-year Spanish yield jumped 29 basis points to 7.13 percent.

World Bank President Robert Zoellick, speaking in Los Cabos yesterday, said that European policy makers bungled their attempt to rescue Spain’s banks. China and Indonesia signaled growing exasperation with more than two years of European crisis-fighting that has failed to stem the threat of global contagion.

“I hope that one way or another our European colleagues will reach an agreement on rigorous methods to manage the crisis,” Indonesian President Susilo Bambang Yudhoyono, who heads Southeast Asia’s biggest economy, said in a speech in the Mexican resort. “The absence of such methods will have unsettling consequences to all of us.”

Boosting Demand

G-20 officials were still negotiating last night on the language to be used in their statement to be issued at the summit’s conclusion. The talks included discussions on using language similar to pledges made at Cannes, France, last year, the Canadian official said. At Cannes, some European countries pledged to reduce deficits while emerging markets and those with healthier finances said they’d boost demand if needed.

Merkel, Monti, Rajoy and French President Francois Hollande, the heads of the four biggest euro economies, next meet in Rome on June 22, before a full European Union summit in Brussels on June 28-29 that will discuss paths to closer political and economic union in a bid to regain market confidence. European Union President Herman Van Rompuy and European Commission President Jose Manuel Barroso are also in Los Cabos.

EU leaders will pledge “to mobilize all levers and instruments” to ensure financial stability and tackle the debt crisis, according to draft conclusions prepared for the Brussels summit.

As countries from the U.S. to China prod euro-area leaders to keep the crisis from spreading, a boost in the International Monetary Fund’s global financial backstop is moving back into focus after Merkel called for the rest of the world to do more. The G-20 will boost the $430 billion firewall the IMF announced in April, Mexican President Felipe Calderon, the meeting’s host, said on June 16.

To contact the reporters on this story: Theophilos Argitis in Los Cabos at targitis@bloomberg.net; Tony Czuczka in Los Cabos at aczuczka@bloomberg.net

To contact the editor responsible for this story: Alan Crawford at acrawford6@bloomberg.net


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