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EU must prevent market rout

WASHINGTON: European Union leaders are under pressure to agree on immediate steps towards a full-scale rescue of ailing euro zone economies or risk a stock market rout when exchanges open tomorrow.

WASHINGTON: European Union leaders are under pressure to agree on immediate steps towards a full-scale rescue of ailing euro zone economies or risk a stock market rout when exchanges open tomorrow.

Fears that months of debate over how to resolve the Greek debt crisis had brought the world economy to another "Lehman's moment" led several prominent analysts to warn that the situation could spark a run on bank stocks this week.

The US President, Barack Obama, and the US Treasury secretary, Tim Geithner, welcomed a commitment by the European Central Bank to step up its efforts to boost growth, which could mean a cut in interest rates at its next meeting in October, but pressed France and Germany to move quickly with a rescue package to prevent further turmoil.

The British Chancellor of the Exchequer, George Osborne, said the leaders of the euro zone had six weeks to end their political wrangling and resolve the continent's crippling debt crisis.

Eric Wand, a gilts strategist at Lloyds Corporate Markets, warned loans from the European Central Bank would be more sticking plaster and unlikely to satisfy investors.

"[They] are hoping for a co-ordinated policy response. If we get that, then risk assets could rally, but for how long? More liquidity doesn't really cut the mustard," he said.

On Friday, another day of volatile trading on global stock markets, Moody's downgraded eight Greek banks due to their exposure to the country's debt amid concerns about Greece's ability to get the ?8 billion ($11 billion) of bailout cash it needs to make debt payments next month.

Speaking in Washington, Mr Osborne said the turmoil in the world's financial markets meant that there was now "a far greater sense of urgency" as well as mounting pressure on Europe from the G20 group of developed and developing nations.

"There is a sense from across the leading lights of the euro zone that time is running out. There is a clear deadline at the Cannes [G20] summit in six weeks time," he said. "The euro zone has six weeks to resolve this political crisis."

Mr Osborne said "bad politics" were leading to "bad economics" in the euro zone. "We need political solutions that can help resolve the economic problems."

He said Europe needed to show that it had enough firepower to convince the markets it was getting ahead of the curve, and made it clear that the ?440 billion European Financial Stability Facility needed to be beefed up. "I am not sure it is adequate," Mr Osborne said.

He refused to speculate on whether Greece would be forced to default on its debts, but said the British government had contingency plans in the event that the worst-affected euro zone country did capitulate. "I have made it a priority for the [British] Financial Services Authority and the Bank of England to make sure that the ... banking system is adequately capitalised."


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