World calls for urgent eurozone action to prevent new crash

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Urgent warnings that the debt crisis could destroy the eurozone and wreck global growth rained down on the EU on Thursday, with world governments alarmed and banks under pressure, while equities and the euro plunged.

Leaders of Australia, Britain, Canada, Indonesia, Mexico and South Korea urged the eurozone to tackle its crisis in a letter to the G20, amid heightened tensions about the banking sector's exposure to debt-plagued peripheral member nations.

The joint letter said there was a risk of contagion to the world economy if the governments of euro countries failed to confront the currency's spiralling troubles, which have witnessed huge bailouts for Greece, Ireland and Portugal.

"Eurozone governments and institutions must act swiftly to resolve the euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy," the letter said, amid concern that the crisis could engulf Italy and Spain.

At the same time, the European Central Bank warned that the eurozone crisis and persistent overspending by member nations could jeopardise the ultimate success of the single currency.

"Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of EMU (European Monetary Union) itself," said the study, co-authored by the ECB's outgoing chief economist Juergen Stark.

Across the Atlantic, World Bank president Robert Zoellick said advanced countries needed to act quickly to resolve their crises before they ravage the rest of the global economy.

"Europe, Japan, and the United States must act to address their big economic problems before they become bigger problems for the rest of the world," he said.

"Not to do so is irresponsible."

"Some developed country officials sound like their woes are just their business. Not so," Zoellick said as he warned poorer countries of the fallout that could come from the advanced economy crises.

US Treasury Secretary Timothy Geithner meanwhile argued that boosting growth should be the top priority of governments around the world, and urged them to adjust their fiscal policies accordingly.

"We should recognize that growth is weaker and governments should do what they should do in that context.

"They should recognize growth is the major challenge we face around the world," he said, calling on governments to adjust their economic policies to the "new reality."

Global stocks also tumbled Thursday after the Federal Reserve warned overnight of serious downside risks to the world's biggest economy. London, Paris, Frankfurt and Madrid dropped by more than five percent at one stage.

Last night's Fed announcement piled further misery on markets already reeling due to the ongoing Greek debt crisis, which analysts fear could end with Athens defaulting and spark another global financial crisis.

European Commissioner for Economic and Monetary Affairs Olli Rehn vowed that the European Union would not permit any disorderly default by Greece that could break down the eurozone.

"It is important to underline that the European Union is not going to abandon Greece. An uncontrolled default or exit of Greece from the eurozone would cause enormous economic and social damage," Rehn said in Washington.

Athens on Wednesday unveiled more painful cuts to unlock bankruptcy-saving loans from the EU and IMF.

Dealers' screens were awash with red as the Fed's latest multi-billion-dollar move to shore up the American economy was met with worldwide disappointment.

In late afternoon deals, London was down 4.35 percent, Frankfurt plunged 5.07 percent and Paris shed 4.66 percent. Elsewhere, Madrid was down 2.21 percent and Milan sank 3.71 percent.

The European single currency plunged to a 10-year low point against the yen, and an eight-month dollar low at $1.3385. It dived to 102.22 yen, which was the lowest level since June 2001.

The Fed announced overnight that it would shift $400 billion in its shorter-term debt portfolio holdings to longer-term bonds, a move it said would lower rates for mortgage holders and businesses.

But the widely-expected plan -- nicknamed 'Operation Twist' -- was overshadowed after the Fed warned of "significant downside risks to the economic outlook" amid high unemployment, slow growth and a depressed housing market.

Sentiment was further damaged by the re-emergence of a bitter political row to raise Washington's debt ceiling.

Investors have been on the back foot this week ever since Italy was slapped with a surprise rating downgrade.

© 2011 AFP

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