Obama says Europe’s debt crisis is ‘scaring the world’

US President Barack Obama says the financial crisis rippling through Europe is “scaring the world” and that steps taken by European nations to stem the eurozone debt problem “haven’t been as quick as they need to be.”

Speaking at a town hall hosted by LinkedIn, Obama said Europe never fully healed from the financial crisis in 2007. He said Europe’s troubles have spilled beyond the continent and are affecting the US economy as well.

Eurozone officials are working on ways to magnify the financial firepower of the eurozone’s rescue fund to fight a sovereign debt crisis more effectively, a senior European Central Bank policymaker said yesterday.

ECB executive board member, Lorenzo Bini Smaghi, said in New York that European policymakers had already begun discussing the next steps to quell a crisis that threatens to derail a fragile world economic recovery.

The €440 billion rescue fund’s assets could be used as collateral to borrow from the ECB, making more money available to stop the crisis spreading, but it was up to EU governments to decide how to do this, Bini Smaghi said.

“I know that people are thinking about these things. They may not be willing to admit it in the public, but they are thinking about these things,” he said, citing US programmes used to rescue banks in the 2008-9 financial crisis.

“Initially the he Troubled Asset Relief Program (TARP) was used to buy assets and then it was used to recapitalise the banks and it was used to pay Term Asset-Backed Securities Loan Facility (TALF), so I think we are now discussing how to do this, how to leverage the money out of the European Financial Stability Facility (EFSF) in a more innovative and efficient way,” he told a conference organised by Medley Advisors.

A senior European official told Reuters on Saturday that the aim was to leverage the fund fivefold to shield bigger economies such as Italy and Spain from contagion, but there was no agreement yet on how to do that.

In Brussels, eurozone officials played down media reports of emerging plans to halve Greece’s debts and recapitalise European banks to cope with the fallout, stressing that no such scheme is yet on the table.

Europe came under fierce pressure from the US and other major economies at weekend talks in Washington to take swift, decisive action to stop Greece’s debt woes engulfing bigger eurozone states and wreaking wider damage.

But officials said reports that planning was already in place for a 50% writedown in Greek debt and a vast increase in the EFSF were highly premature.

“There is no change to the framework we are working on,” said a eurozone official who is involved in decision-making on financial assistance to Greece, Ireland and Portugal.

“All this talk of a specific haircut for Greece or an enlargement of the EFSF, it is all just speculation. We are not working along those lines,” said the official.

German Chancellor Angela Merkel , struggling to convince her fractious centre-right coalition to back a strengthening of the EFSF in a crucial vote on Thursday, warned that letting Greece default would destroy investor confidence in the eurozone.

Private economists and Brussels think-tanks expect a Greek debt default within months or sooner, coupled with a capital injection for European banks and a leveraging up of the EFSF.

Eurozone officials acknowledge that such policy ideas are circulating and some could constitute a longer-term response to the 20-month-old debt crisis. But they insist no specific plans are yet in the works.

Instead, planning continues on the basis that Greece’s debt burden, which is close to 160% of GDP, can be sustained as long as the government fully implements austerity measures demanded by the European Commission, the European Central Bank and the IMF, the so-called troika.

US Treasury Secretary Timothy Geithner highlighted global concerns about inadequate European crisis management, saying on Saturday: “The threat of cascading default, bank runs and catastrophic risk must be taken off the table.”

IMF chief Christine Lagarde also made clear the eurozone needs to act more decisively, notably to recapitalise banks on a large scale.

Quietly, eurozone policymakers accept that a combination of a much deeper Greek debt restructuring allied to coordinated bank recapitalisations and a bolstered rescue fund would make sense and might help the eurozone get on top of the crisis.

But such a plan would require support from all 17 eurozone countries, and it takes time in the EU’s decision-making structures to bring so many moving parts together at once.

Instead, the next step is expected to be a decision by the EU, ECB and IMF to sign off on the next tranche of support for Greece — the sixth payment from the original €110bn package agreed in May last year.