4th UPDATE:G-20 Pledges Support For Banks, EU To Bolster Rescue Fund

PARIS, Oct 15, 2011 (Dow Jones) -- The Group of 20 industrialized and developing economies will continue to ensure banks have sufficient capital and the European Union will work to maximise the impact of its EUR440 billion bailout fund, according to a draft communique read by G-20 officials Saturday.

World financial leaders meeting in Paris said their central banks stand ready to provide needed funding to banks as necessary, according to the draft document. Officials also made progress on a coordinated G-20 "action plan" to boost global growth and help pull the world economy out from the mire.

The G-20 left open a debate about boosting funding to the International Monetary Fund as one of the global lenders of last resort. Some key developing economies has warned the IMF needed more funding to backstop the European debt crisis. They faced strong opposition from the U.S., Canada and other developed economies.

"Additional IMF resources must not be a substitute for the euro zone committing its resources to supporting its own currency," the U.K.'s Chancellor of the Exchequer George Osborne said Saturday.

The Paris meeting comes as the European debt crisis threatens to halt an anemic global economic recovery and create another world-wide financial meltdown. Although emerging market nations have helped to pull advanced economies through the last several years since the 2008 financial crisis with strong expansions, their economies are at risk from major investment reversals and plunging demand from trading partners.

The plan taking shape among euro-zone countries to address the crisis is built on three central elements: a new bailout for Greece, an effort to shore up the banks affected by Greek losses and additional firepower for the European Financial Stability Facility, the bloc's bailout fund, to provide a reassuring backstop.

"We look forward to further work to maximize the impact of the EFSF in order to avoid contagion and to the outcome of the European Council on October 23 to decisively address the current challenges through a comprehensive plan," the G-20 draft said.

"We will ensure that banks are adequately capitalised and have sufficient access to funding," the draft said. "Central banks have recently taken decisive actions to this end and will continue to stand ready to provide liquidity to banks as required."

The International Monetary Fund has urged euro-zone authorities to bulk up the capital buffers at dozens of the region's weak banks. IMF officials have estimated between EUR100 billion to EUR200 billion in extra capital is needed to protect against banks' exposures to bad government debt in the euro zone.

G-20 officials reaffirmed support for "market-determined exchange-rate systems and achieve greater exchange-rate flexibility to reflect economic fundamentals." But the draft communique avoided tougher language calling out China's currency policy. The U.S. said prior to the meeting it would press Beijing to speed up appreciation of the yuan, which would not only help spur demand in China, but help other trading partners grow.

In a nod to problems Japan, Switzerland and other countries are facing with fast-changing tides of international capital flows, the G-20 reiterated "excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability."

Saturday's meeting here includes non-European countries, among them the U.S., which pushed Europe to speed up the process. Their counterparts from major emerging markets have delivered the same message.

But a new bailout will come with losses for the banks and other private-sector investors who lent to Greece. There is broad concern that if creditors of Italy and Spain fear the same fate awaits them, there will be a flight out of those countries' bonds that Europe's bailout fund would be powerless to stop.

A likely way to leverage the fund, officials say, is an insurance plan under which the EFSF offers investors in European debt some protection against losses, in the hopes of drawing more buyers.

"One of the options considered is the EFSF guaranteeing about a quarter of new bonds by countries in trouble, but there is nothing firm yet," one euro-zone official with knowledge of the talks said Saturday.

Such a program is more limited than other options, like ECB financing, and less able to guard against a rapid cessation in lending to a big country like Italy or Spain. None of the solutions would address investors' concerns definitively.

Leaders hope to have the plan ironed by a series of meetings next weekend in Brussels. If they fail, another meeting of G-20 leaders awaits in early November.

G-20 officials once again agreed that countries with current account surpluses should boost their domestic demand. The two most significant of those countries are Germany and China.

The German economy is heavily dependent on exports, sparking criticism that Berlin runs a beggar-thy-neighbor policy at the expense of economic growth in the rest of Europe. The world's second-largest exporter after China, Germany rejects the criticism and argues that other European countries should carry out structural reforms and cut budget deficits to make their economies more competitive.

"Emerging market economies will address macroeconomic policies where needed to maintain growth momentum in the face of downside risks, contain inflationary pressures and endeavour to enhance resilience in the face of volatile capital flows. Surplus emerging market economies will accelerate the implementation of structural reforms to rebalance demand toward more domestic consumption, supported by continued efforts to move toward more market-determined exchange rate systems and achieve greater exchange rate flexibility to reflect economic fundamentals."

G20 officials also agreed that developing economies with large trade surplus should continue their efforts to make their exchange rates more flexible.

This largely reflects frustration by other countries, notably the US, about China's control over the yuan's exchange rate, which have been criticized as being undervalued for benefiting Chinese exporters at the expense of US workers and firms.

The US Senate recently passed a bill targeting Beijing's currency policy, and China has hit back calling on Washington to stop politicizing economic issues and warning that the bill could start a trade war.

The People's Bank of China said Wednesday that the yuan isn't undervalued and is nearing a "balanced and reasonable level."