Leaders of the G20 looking to use today’s summit to kick-start global economic growth were given a stark reminder of the uphill task they face as a rally in financial markets sparked by the Greek election fizzled out.
Stock markets opened in buoyant mood on Monday while the euro gained and risky assets surged after the pro-austerity party in Greece, New Democracy, won a narrow victory in the general election.
But prices turned south as traders shifted their attention to the outlook for Spain, as figures showed a sharp rise in non-performing loans held by the country’s banks.
The yield on Spanish 10-year bonds, which moved in the opposite direction to its price, jumped to 7.28% - the highest level since the euro was established in 1999.
Leaders of the G20 economies are working to deliver a growth plan and to rubber stamp a deal to inject $430 billion into the International Monetary Fund to convince markets they are prepared to take decisive action.
However speculation was growing that the G20, which includes fast-growing emerging economies as well as the biggest euro members, would use their communiqué to pledge support for the single currency.
According to an early draft of the communiqué that was leaked to Reuters, they will urge eurozone countries to find ways to break the “feedback loop” between governments and banks.
Leaders arriving in Los Cabos piled on the pressure on the eurozone. Indian prime minister Manmohan Singh told reporters the world was in “deep trouble”.
"This situation in Europe is of particular concern, as Europe accounts for a significant share of the global economy," he said.
Australian prime minister Julia Gillard said European leaders needed to take decisive action by recapitalizing its banks, and embracing greater fiscal and banking integration.
“Go for growth but with rules that will allow them to repair their budget balances over time,” Gillard said last night. “The world has an interest in seeing a strong and stable eurozone.”
In a clear sign the summit would now be dominated by the euro crisis, Jose Manuel Barroso, president of the European Commission, said he expected the G20 to “support and express their confidence in” the steps taken by Europe to stem the crisis.
Meanwhile David Cameron, prime minister of the UK, the largest European economy outside the eurozone, gave a strong hint he wants to see the European Central Bank (ECB) intervene.
“It is becoming increasingly clear in the eurozone that the core, including the ECB, must do more to support demand and share the burden of adjustment,” he told fellow leaders.
But the G20 will strive to ensure that the core themes of the Mexican presidency also feature strongly in the communiqué.
These include the so-called Los Cabos Action Plan aimed at committing each member to take action to restart economic growth.
According to the leaked draft, the G20 leaders “are committed to take all the policy measures needed to strengthen demand, help global growth and restore confidence.”
However this may be overshadowed by an argument between countries calling for a greater focus on growth stimulus and those insisting on retaining fiscal austerity as a priority.
As revealed by Emerging Markets yesterday, Brazil has teamed up with France to oppose Germany-led imposition of austerity measures in the euro zone.
But Barroso insisted the action plan should be a “balanced combination of fiscal consolidation and structural reforms that will serve as a concrete framework for all G20 countries to renew their commitments to boost global growth”.
The other main economic ambition for the Mexicans is to strike the hammer on a $430 billion recapitalisation of the IMF, the largest in the Fund’s history, aimed at building a firewall against euro contagion.
The final element is expected to put in place today when the BRICS economies – Brazil, Russia, India, China and South Africa – reveal the size of their commitments.
While most lenders have spelled out contributions amounting to $340 billion, the division of the remaining $70 billion has stayed under wraps. Mexican president Felipe Calderon indicated on Sunday the total would exceed $430 billion.
However the BRICS, who held their own meeting on the fringes of the Summit, stressed their loans would come on condition of further reforms that would give them more say in IMF governance.
“These new contributions are being made in anticipation that all the reforms agreed upon in 2010 will be fully implemented in a timely manner, including a comprehensive reform of voting power and reform of quota shares,” they said in a statement.