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G20 pledge to stabilise banks and markets


World’s largest economies look to calm investor fears amid euro zone crisis and concerns about US prospects

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Finance ministers and central bankers from the world’s largest economies have pledged to take all necessary action to stabilise the banking sector and global financial markets.

The G20 said the European Financial Stability Facility (EFSF) could be bolstered but fears remain about the exposure of banking groups to Greece’s sovereign debt.

“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the group, including the United States and China, said in a communique after a dinner meeting on Thursday.

World stocks had slumped on Thursday to their lowest level in 13 months, hurt by the risk of a new US recession and weaker economic data from China as well as Europe’s debt problems.

But the pledge of action from the G2O gave a lift to the euro in early trade on Friday, while softening stock losses in Asia. US stock futures pointed to a higher open in New York.

In a sign the euro zone was working on adding to the potency of its €440 billion financial rescue fund, the G20 statement said the bloc’s members would implement “actions to increase the flexibility of the EFSF and to maximize its impact” by the group’s next ministerial meeting in October.

No details were given of how the EFSF might be altered, although French finance minister Francois Baroin used the word “leverage” in comments to reporters.

The United States has previously proposed that Europe could leverage up the EFSF, giving it more clout to protect the euro zone and its banks.

A US official, speaking after the G20 meeting, said the group showed a heightened sense of urgency but did not discuss a specific mechanism to leverage or expand the bailout fund. Initially, officials had not planned to issue a statement, but came out with a hurried communique after Thursday's big stock market sell-off.

A G20 source said the reference to the EFSF in the communique was left ambiguous to keep open the possibility of leveraging up the fund or using it to buy government debt on secondary markets.

European political leaders, especially in Germany, have opposed dedicating more money to offsetting what they see as the profligacy of highly indebted countries such as Greece, complicating discussions about fighting the financial crisis.

At the same time, tensions have flared within the European Central Bank over its role in buying debt of struggling euro zone countries. Euro zone officials have said leveraging the EFSF could run into big legal problems.

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G20 pledge to stabilise banks and markets
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