The financial crisis that began in Europe now poses a real threat to the entire global economy, according to a major economic organisation.
The Organisation for Economic Co-operation and Development (OECD) issued the warning as it cut its global growth forecast for this year and next, and European leaders struggled to contain debt and save their common currency.
The British finance minister is to deliver on Tuesday a statement that is expected to support strict spending cuts, despite a planned general strike.
And in Brussels, eurozone finance ministers are meeting to discuss bolstering their bailout reserve, the European Financial Stability Fund (EESF), to help prevent contagion in bond markets.
Tuesday’s meeting of the Eurogroup brings together finance ministers from the 17 eurozone members who are likely to approve the next tranche of emergency loans for Greece and Ireland.
Underlining the threat to European economies, however, the ratings agency Moody’s warned on Tuesday it could downgrade the subordinated debt of 87 banks across 15 countries on concerns that governments would be too cash-strapped to bail them out.
Standard Poor’s, Moody’s rival, could downgrade the outlook on France’s top-level triple-A credit status with the next 10 days, hinting at a possible ratings cuts, a newspaper reported. The news briefly hit the euro.
On Tuesday, British finance minister George Osborne revealed a gloomy outlook for the economy, saying in his autumn budget statement growth in the coming year would be lower than expected.
He warned the eurozone crisis was the most pressing issue and needed to be resolved for the sake of Europe and the world.
Osborne’s budget statement came amid reports that protests would be organised for Wednesday over the economic situation in the county.
Under US pressure
Barack Obama, meanwhile, is pressuring European Union officials to act quickly and decisively to resolve their sovereign debt crisis.
Jay Carney, the White House spokesman, said the US president’s message, delivered to senior EU officials behind closed doors on Monday in Washington, was that: “Europe needs to take decisive action, conclusive action to handle this problem, and that it has the capacity to do so.”
Documents obtained by the Reuters news agency on Sunday show the detailed guidelines for the EFSF were ready for approval, opening the way for new operations and multiplying the fund’s effective size.
The documents spell out rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and its investment and funding strategies.
“I would expect we will be in a position to approve the guidelines at a political level,” a euro zone official involved
in the preparations for the ministers’ meeting said.
The EFSF guidelines will clear the way for the 440bn euro facility to attract cash from private and public investors
to its co-investment funds in coming weeks.
Germany and France stepped up a drive on Monday for coercive powers to reject euro zone members’ budgets that breach EU rules, alarming some smaller nations who fear the plans by-pass mechanisms for ensuring equal treatment.
Berlin and Paris aim to outline proposals for a fiscal union before an EU summit on December 9 increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.
“We are working intensively for the creation of a Stability Union,” the German finance ministry said in a statement.
“That is what we want to secure through treaty changes, in which we propose that the budgets of member states must observe debt limits.”
Heart of Europe
Rumours about the threat to France’s credit rating, which have circulated for several months, illustrate how the crisis has moved from indebted peripheral nations such as Greece and Portugal to the heart of Europe.
La Tribune, an economic and financial daily, reported on its website that SP’s was preparing to change its outlook on France’s sovereign rating from “stable” to “negative”.
The news coincided with the warning on subordinated debt from Moody’s, which said the greatest number of ratings to be reviewed were in Spain, Italy, Austria and France, and knocked the euro a third of a cent before the currency recovered.
“Moody’s believes that systemic support for subordinated debt in Europe is becoming ever more unpredictable, due to a combination of anticipated changes in policy and financial constraints,” the agency said in a report.
Mario Monti, Italy’s prime minister and finance minister, will attend Tuesday’s meeting in Brussels to explain the reforms Italy plans to undertake to regain the confidence of markets.