George Osborne: ‘Six weeks to eurozone meltdown’

CHANCELLOR George Osborne warned his European counterparts last night they had just six weeks to sort out the crisis in the eurozone as the threat of a Greek default put huge pressure on Europe’s banks.

Analysts suggested European banks could lose €40 billion if Greece defaults, but there were continuing fears over the state of the Italian economy that could leave the financial institutions exposed to hundreds of billions of pounds.

World leaders fear that the eurozone crisis could trigger a meltdown of the banking system worse than the one in 2008 that saw Royal Bank of Scotland, Halifax Bank of Scotland and Northern Rock rescued from collapse by the taxpayer.

Stock markets across the world saw record falls this week, and economic growth forecasts, including that of Britain, were downgraded.

As finance ministers gathered at the G20 summit of the world’s leading economies in Washington yesterday, Mr Osborne said the eurozone had to resolve matters by November or risk catastrophe.

Mr Osborne said: “There is now a recognition that they are at the epicentre of the global debt crisis and that they have got weeks, not months, to sort it out.

“All the world leaders are going to be gathering in France in early November.

“That will be the moment where we need to see the comprehensive solution that we have been promised for a while.”

His warning came as the head of the International Monetary Fund and former French finance secretary Christine Lagarde said countries needed to “act now and act together” to maintain the economic recovery.

“We are by no means strangers, and we are linked by a common destiny,” she said at the annual meeting of the IMF and the World Bank, also in Washington.

“And these turbulent times must bind us ever closer together.”

She warned: “There are dark clouds over Europe and there is huge uncertainty in the US, and with that we could risk a collapse in global demand. We are all in it together and nobody should be under any illusion that there could be a de-coupling.”

Both Ms Lagarde and Mr Osborne suggested that European leaders had failed to tackle the Greek financial crisis early enough.

Ms Lagarde added: “There is a path to recovery. It’s narrower than it was three years ago but there is a path and we have options.”

While analysts believe European banks can absorb a Greek default they feared that there may be worse to come, with Ireland, Portugal and Spain all in the danger zone.

The IMF reckons Europe’s banks could need to recapitalise to the tune of €200bn, and many bank analysts are even gloomier than the fund.

Credit Suisse calculates banks may need €400bn of capital by 2012 to fill a hole left by losses on sovereign debt and higher funding costs.

Barclays Capital estimated European banks could need about €230bn to preserve their capital buffers in the extreme case they lose half the value of Greek, Irish, Portuguese, Spanish and Italian debt.

Labour leader Ed Miliband renewed his calls for an emergency meeting to agree “a plan for growth” to steer the global economy back towards recovery.