Leaders warned of danger of new crisis

EUROPEAN finance ministers have been warned confidentially of the danger of a renewed credit crunch as a “systemic” crisis in eurozone sovereign debt spills over to banks.

In a report prepared for ministers meeting in Poland on Friday and Saturday, senior EU officials said the 17-nation eurozone faces a “risk of a vicious circle between sovereign debt, bank funding and negative growth”.

“While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic,” the Economic and Financial Committee said.

“A further reinforcement of bank resources is advisable,” ministers were told in language that echoed an IMF call for urgent action to recapitalise European banks.

The report highlighted European policymakers’ challenge to restore confidence as the leaders of Germany, France and Greece held a conference call on efforts to avert a Greek default.

The euro and European stocks were earlier boosted by an announcement by the head of the European Commission that the EU executive would soon present options for issuing a common eurozone bond, despite fierce German resistance.

Many investors see joint debt issuance as the best way out since it would reassure markets that Europe’s strongest economies were taking responsibility for weaker states.

But there is strong political opposition in northern Europe to underwriting the debts of what are seen as profligate southern states, making eurobonds a distant prospect.

Economic Affairs Commissioner Olli Rehn said issuing common eurozone bonds would require much more intrusive surveillance of member states’ fiscal and economic policies, which would have to be fully debated in each country.

A German finance ministry spokesman reaffirmed Berlin’s opposition to the idea.

With senior EU and IMF inspectors due in Athens on Monday to check Greece’s faltering compliance with its bailout plan, chancellor Angela Merkel and President Nicolas Sarkozy urged prime minister George Papandreou to implement austerity measures to meet fiscal targets, a French statement said.

Sarkozy and Merkel “are convinced that the future of Greece is in the eurozone”, easing concern the monetary union may fall apart.

“Despite recent rumours, all parties stressed Greece will remain in the eurozone,” a Greek government spokesman said.

A Greek official said after the call that Athens expected the troika to report that Greece was on track to meet its 2011-2012 targets.

Papandreou yesterday committed to meet deficit-reduction targets demanded as a condition for an international bailout.