Europe races to erect crisis defences

(BRUSSELS) - European leaders dramatically pulled out on Saturday of World War II commemorations in Moscow as they raced against the clock to fund a new crisis firewall before financial markets re-open in Asia.

Seeking a "watertight" defence against predatory threats to banks and wider economic recovery, EU officials scrambled to fix the size and scope of money that may eventually outstrip the unprecedented Greek bailout, due to be transferred to Athens within days.

French President Nicolas Sarkozy cancelled his trip to Russia to pull strings on the financial crisis, his office said, with Italy's ANSA reporting that Prime Minister Silvio Berlusconi had also withdrawn from Sunday's Red Square parade.

But German Chancellor Angela Merkel said she would attend the ceremonies.

Berlusconi told fellow leaders on Friday that the eurozone was in a "state of emergency".

"The European Commission is working today on the proposal it will make... to preserve financial stability in Europe," a Brussels spokesman said on Saturday.

An EU diplomat told AFP that a kind of "bank" would be established with unused funds lying in the bloc's budget, which would be used as "base capital on which to borrow 60 billion euros (76.5 billion dollars) on the bond market".

The source said that would be supported by a "gesture" from the politically independent European Central Bank, meaning a signal that it would intervene to buy euro governmental debt, which could mean vastly higher numbers.

The EU executive's cabinet will meet from 1:00 pm (1100 GMT) on Sunday "to discuss and adopt that proposal" ahead of an emergency meeting of finance ministers from the 27-nation bloc from 1300 GMT.

"We have several instruments at our disposal and we will use them," commission chief Jose Manuel Barroso said.

Berlusconi said ECB chief Jean-Claude Trichet was not ruling out a so-called 'nuclear' option, although Trichet, coy on the issue, had himself pinpointed "the responsibility of the EU council (of leaders) and of the European Commission".

Diplomats said that powers in "exceptional circumstances" that previously allowed the EU to help non-euro members like Hungary, Latvia or Romania could be invoked to facilitate the scheme.

A chain of European debt that sent shares tumbling across the globe last week has left EU banks in the firing line as investors flee amid growing fears that eurozone governments will be unable to balance their books over coming years.

"I am very concerned about what's happening in Europe," US President Barack Obama told Russian TV in a White House interview released Saturday but conducted before the eurozone agreement.

However, Canadian premier Stephen Harper, speaking in Berlin at a joint news conference with Merkel ahead of next month's G20 summit in Toronto, argued that "this is not a crisis of the financial sector but a financial crisis affecting some governments."

After leaders agreed to "accelerate" public deficit reduction plans, Portugal was first to announce a quickened pace of cuts on Saturday.

"Between now and Sunday night we will have a watertight line of defence," euro finance chief Jean-Claude Juncker said.

Barroso insisted that these efforts "will be done under the existing financial possibilities in the community budget".

However, doubts remained for non-euro countries over the longer-term impact on taxpayers.

As the major EU buyer of European governmental debt, the dangers are keenly felt in Germany, which had been accused of foot-dragging over the lion's share of Greek loans.

Merkel said the new fund would send "a very clear signal" to markets to back off.

"Europe is faced with the same challenge from the Greek crisis as it faced in October 2008 after Lehmann Brothers fell," Christian de Boissieu, an economics professor at the Sorbonne in Paris, told AFP.

Euro leaders also agreed to "reinforce" bloc budget rules and impose new curbs on speculators.

Labour Chancellor Alistair Darling will speak for Britain during Sunday's ministerial meeting as talks on power-sharing between two political rivals unfold back in London, and can expect to be pressured on Britain's refusal in March to entertain eurozone curbs, which critics say cost Europe dearly.

Former Spanish premier Felipe Gonzalez blamed "the general election held the day before yesterday" (Thursday).

European Greens leaders Rebecca Harms and Daniel Cohn-Bendit also said leaders had waited until "the brink of the abyss" and urged Europe to create a "genuine European Agency for Debt and Investment which would manage the issuance of eurobonds".

Main initiatives of eurozone summit on economic crisis

STATEMENT OF THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA, Brussels, 7 May 2010