Greek Prime Minister George Papandreou and European Council president Herman Van Rompuy after their crisis talks at the EU headquarters in Brussels.The IMF, which has contributed to the bailouts of Greece, Portugal and Ireland, urged the 17 eurozone countries to take "decisive action" and turn themselves into a "fully integrated" monetary union to prevent the debt crisis spilling around the world.
The call to action came as researchers in London warned that the "ultimate burden" from Greece defaulting on its debts could fall heavily on the US and British banks because they were so deeply tied into the world financial system.
Fathom Financial Consulting will say in a major report to be published overnight: "The notion that Greece can fall alone is fanciful and dangerous. Greece will not suffer alone -- the implications of the default will reverberate far and wide."
Eurozone finance ministers yesterday increased the pressure on Athens by refusing to release the next promised bailout cheque of E12 billion ($16.3bn) to pay Greek debts until its government approves austerity measures and a huge privatisation program. The delay in approval sent a chill through the financial markets, with the euro losing ground against the US dollar and bank shares sliding.
A mission of eurozone, IMF and European Central Bank officials were expected to arrive in Greece overnight to ensure their demands have been written into draft Greek legislation.
An official from one eurozone country said: "If we gave the green light for the E12bn, then it would be a blank cheque -- and then the credibility of the zone is at stake as well."
In a report on the euro area, the IMF said the sovereign debt crisis threatened to overwhelm an otherwise favourable economic outlook for the region. Action was needed in the interests of the entire world, the fund said. "With deeply intertwined fiscal and financial problems, failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers."
Danny Gabay, an economist at Fathom, said: "We are heading towards a disorderly unwinding of this, and to me it is palpable how much like the Lehman debacle it is. Someone sold a lot of insurance and guarantees against this sort of event. From the data, that someone looks like Britain and the US."
The British banks' exposure to eurozone countries, including Greece, Italy, Spain, Ireland, France and Germany, amounts to E412bn. This includes contracts insuring investors against debt defaults. The equivalent figure in the US is far higher, at $US1.8 trillion ($1.7 trillion).
Some leading analysts fear Greece will be unable to survive in the euro area and could be forced to exit. Mark Hoban, a British Treasury minister, ducked questions in Britain's House of Commons yesterday on whether the euro would survive in its current form. But the former foreign secretary, Jack Straw, said the euro "cannot last" as he urged the government "to be open with the British people" about the alternatives to a European single currency. The Labour MP said there was a "mood change" in Europe, with former europhiles "contemplating the end of the euro as we know it".
The IMF's European director, Antonio Borges, said: "We have an imbalanced system, and what we are trying to say is that in a process like monetary union, until you become fully integrated like the United States with a fully integrated monetary union, you have these obstacles which magnify the problems."
Greek Prime Minister George Papandreou was expected to face a confidence vote in his new cabinet overnight, and has vowed to push through a promised E28bn austerity package by the end of the month. A widely opposed E50bn privatisation program has yet to be signed off by the parliament.
Eurozone ministers have decided to meet on July 3 to check Greece has adopted all the EU-IMF measures, and then release its next bailout payment.
