Growing divisions over the weekend between European policymakers and their increasingly frustrated global counterparts threatened to torpedo efforts to find a swift solution to the mounting eurozone crisis.
Officials from the single currency bloc rejected calls at the IMF’s meeting in Washington for radical action, insisting that measures agreed at a July summit, currently being ratified by member parliaments, would be sufficient to calm investor nerves and head off an escalation of the eurozone debt crisis.
But this put them increasingly at odds with policymakers and financiers from outside the region, who warned in no uncertain terms over the weekend that time was running out for eurozone politicians to find a solution to the crisis.
Participants in one of the most fractious gatherings in years of global financial leaders said the mood was tense amid a growing recognition of the severity of the situation.
"I’ve been coming to these meetings for 20 years [and] there has not been a time when the situation was more ominous than the current situation," former US treasury secretary Larry Summers told Emerging Markets.
While the UK and US were among the most outspoken critics of the European response, the battle lines were increasingly drawn between the eurozone ministers attending the meeting and much of the rest of the world.
"There are big divisions," Gerard Lyons, chief economist at Standard Chartered, said in Washington on Sunday. "The Americans and Asians want a quick resolution to the euro crisis ... but European leaders seem to think that the July 21 proposals just need to be implemented for everything to be alright. But events have moved on."
The measures in question would see an enlargement of the scope – but not the funding – of the EU440 billion European Financial Stability Fund (EFSF), the euro area’s de facto bailout fund for struggling member states, enabling it to intervene in secondary markets and provide tentative lines of credit.
European officials had stressed all week that these measures would help restore confidence to markets and liquidity to paralyzed European banking markets.
But with signs that investors are now increasingly worried about the solvency of sovereign debt issued by larger eurozone members, there are growing calls for a radical expansion of EFSF funding, and for enhanced powers for the ECB.
"The facility available in Europe needs to be far bigger, it needs to not only address the issues on the periphery, it needs to be big enough to deter the markets from taking on the likes of Spain or Italy, so a lot more still needs to be done," Lyons said.
Billionaire investors George Soros told Emerging Markets that eurozone leaders needed to address the possibility of a Greek default rather than denying it, and that they should be preparing for this by ring-fencing other eurozone sovereigns – initially through short-term ECB credit – to prevent a spread of the crisis.
"You would have to strengthen the remaining members to prevent the contagion that would affect Italy and Spain and maybe other countries," he told Emerging Markets in an interview.
Current and former German policymakers (add in Weber link from today) remained defiant in Washington this weekend, however, arguing that trying to solve a debt crisis by issuing more debt was counterproductive.
"I do not deny the possible risks of our strategy to solve the eurozone problems. Yet those risks are considerably lower than the risks of any alternative strategy," German finance minister Wolfgang Schaeuble said on Saturday.
But Soros said that German politicians would ultimately be forced to change their approach. "It’s really a question for people in Germany to realize that they don’t really have a choice," he said. "They think they do."
While eurozone policymakers maintained defiance in public this weekend, many hope that they will heed the warnings and privately discuss a shift once they return home.
"European leaders have been put under such intense pressure here that one would hope and expect that they can do more," Lyons said.
Policymakers and delegates in Washington believe that European leaders have until the G20 summit in Cannes in early November to convince the markets that they have a sustainable solution to the debt crisis.
"The eurozone has six weeks to resolve this political crisis," British chancellor George Osborne said at a press briefing. "Time is running out for [its leaders]. There is a clear deadline at the [G20] Cannes summit in six weeks’ time."
But with the IMF meeting against the backdrop of plummeting markets, slowing growth and rising unemployment in advanced economies, some believe that even if the Europeans belatedly agree to additional measures, that it may be too late to prevent contagion, both to other eurozone states, and further afield.
"It’s not any more about Greece or Ireland or Portugal. The contagion has spread to Italy and Spain," Nouriel Roubini, chairman of Roubini Global Economics, told Emerging Markets in an exclusive interview.
He added: "At this point the debate is not whether we’re going to have a double dip recession or not. The double dip has started.
The only question is whether we are going to have a mild recession in advanced economies or whether we’re going to have a severe recession and another global financial crisis and the answer depends on whether you can keep Italy and Spain together."