The world's leading economies kept the pressure firmly on Europe to sort out its debt crisis on Saturday with the sense of urgency to be reflected in a communique at the end of a G20 finance chiefs' meeting.
The make or break moment in the two-year-old crisis that has spread far beyond starting point Greece could come at a summit of EU leaders on October 23. Germany and France have promised to set out a plan to stop infection, protect Europe's banks and the wider world economy.
We have heard from euro zone colleagues the action they are working on but I think they will have left Paris under no misunderstanding that there is a huge amount of pressure on them to deliver a solution to the crisis, British finance minister George Osborne told reporters.
(The crisis) remains the epicentre of the world's current economic problems. And the European Council is clearly the moment when people are expecting something quite impressive.
The draft communique, which must still be signed off by G20 finance ministers and central bankers, looks forward to further work to maximize the impact of the EFSF (bailout fund) in order to address contagion and to the outcome of the European Council on October 23 -- unusually direct language for G20 diplomats.
Efforts by some countries to increase the IMF's ammunition to fight the crisis ran into resistance from the United States and others on Friday, burying the idea for now and putting the onus firmly back on Europe.
The United States is among countries keen to keep pressure on the Europeans to act more decisively to end the crisis that began in Greece but has since spread to Ireland and Portugal and is lapping at Spain and Italy.
RESISTANCE FROM BANKS
Germany and France are trying to put flesh on the bones of a crisis resolution plan in time for the EU summit. It will involve plans to recapitalize banks, make Greek's debt mountain more sustainable and ramp up the firepower of the bloc's rescue fund. For once in the long-running crisis, the timetable is ambitious.
There were growing signs that Greece's creditor banks would fight any attempt to make them shoulder a bigger burden in restructuring Greece's debts. The Franco-German plan is likely to ask banks to accept bigger losses on their debt than the 21 percent agreed in July, which looks insufficient.
Yet to be decided is whether that can be achieved with the voluntary participation of the banks. Much depends on their attitude.
The lead negotiator for private sector bondholders said imposing greater losses on Greek bondholders could prompt investors to sell other countries' sovereign debt and destabilize the single currency.
We do not see that a compelling case has been made to reopen the (July) deal. A deal is a deal, Charles Dallara, managing director of the Institute of International Finance (IIF) told the Financial Times.
European Central Bank member Juergen Stark, who has resigned in protest at the handling of the euro zone crisis, warned Europe risked damaging its standing among investors.
Governments should honor their obligations, he told Dutch newspaper NRC Handelsblad. This makes Europe look like a very risky region to invest in.
The plan should also lay out a system for recapitalising banks and plans to leverage the euro zone's 440 billion euros European Financial Stability Facility to give it more punch.
Whilst the EFSF has the resources to cope with bailouts for Greece, Portugal and Ireland, it would be overwhelmed by the need to rescue a bigger economy such as Italy or Spain.
The most effective method would be to turn the EFSF into a bank so it could draw on European Central Bank resources. Both Germany and the ECB are opposed to that so attention has turned to the idea of making the fund more like an insurer.
For example, if the EFSF covered the first 20 percent of losses a bank could suffer in case of a default -- it could multiply its firepower fivefold to over 2 trillion euros.
The draft communique said the G20 would ensure that banks are adequately capitalized and have sufficient access to funding. Central banks have recently taken decisive actions to this end and will continue to stand ready to provide liquidity to banks as required.
Fears about the damage a default by Greece -- and possibly others -- could inflict on the financial system have driven a confidence-sapping bout of market volatility since late July, with global stocks falling 17 percent from their 2011 high in May.
But they have picked up since the leaders of France and Germany set themselves an end-October deadline for action.
NO CHANGE ON YUAN, FOREX LANGUAGE
Unlike in 2009 when the G20, which makes up 85 percent of global output, launched coordinated stimulus to pull the world out of crisis, the rest of the world is chafing at Europe's slow response while Washington and Beijing are sparring over the yuan currency.
The draft communique contained language on exchange rates that is no harsher than at their last meeting in Washington. The G20 agreed that advanced economies would consolidate their fiscal deficits and emerging economies like China would continue their move toward greater exchange rate flexibility and boost domestic consumption.
Advanced economies, taking into account different international circumstances, will adopt policies to build confidence and support growth and implement clear, credible, specific measures to achieve fiscal consolidation, the draft said.
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 sources said China had given no indication it was prepared to change pace on greater flexibility of its yuan currency but would commit to boost its consumption through a five-year plan, via households and companies as well as infrastructure.
Any real progress on bigger goals such as setting parameters to measure global imbalances and reining in speculative capital flows is unlikely to come before a November 3-4 summit in Cannes, where France passes the G20 baton to Mexico.
A French finance ministry source said that for Cannes, France hoped to have two or three measures agreed for countries showing imbalances: consolidation measures for those with high deficits and stimulus measures for those with surpluses.
A communique and round of closing news conferences are expected around 1500 GMT with other decisions set up for a G20 leaders' summit in Cannes on November 3/4.
(Additional reporting by Daniel Flynn, Francesca Landini, Randall Palmer, Gernot Heller, Glenn Somverville, Kevin Yao, Abhijit Negoy; Writing by Janet McBride/Mike Peacock)