Greek default: Building a firewall

European Union governments will spend the next six weeks putting together a firewall to protect their fragile banking systems against what is now seen as an inevitable Greek default.

G20 sources said up to 50 per cent was likely to be wiped off the face value of Greece's €350 billion ($608 billion) debt - but not until Europe had put into place a war chest to prevent the contagion spreading.

More money will be disbursed by the International Monetary Fund and the EU next month to keep the Greek Government afloat, but this is seen as a short-term fix while Europe's leaders beef up the eurozone bailout fund, the European Financial Stability Facility (EFSF).

Europe came under ferocious pressure at this weekend's meeting of the IMF in Washington to contain the sovereign debt crisis, which is blamed for dragging the global economy to the brink of a double-dip recession.

The IMF is reportedly willing to continue bailing out Greece for the short-term, provided Europe uses the time to tackle the issue of debt once and for all.

Tim Geithner, the United States Treasury Secretary, said: "The threat of cascading default, bank runs and catastrophic risk must be taken off the table, otherwise it will undermine all other efforts, both within Europe and globally. Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe."

The US and Britain believe Europe needs to deploy massive firepower to prevent a domino effect from Greece bringing down the other vulnerable members of the eurozone such as Portugal, Italy and Spain.

A communique from the finance ministers and central bankers of the IMF's member states, released after yesterday's meetings, reiterated the need for urgent action from the eurozone and set a deadline of mid-October for reforming the bailout fund.

G20 sources said the meetings had ratcheted up the sense of alarm over the crisis, saying "there's been a very visible shift in pace, mood and urgency", but there was a sense of exasperation among non-eurozone members about the lack of action.

Ministers from the G20 group of major economies have called for an urgent ratification of the July 21 agreement, brokered by German Chancellor Angela Merkel and French President Nicolas Sarkozy, to beef up the powers of the EFSF.

British Chancellor of the Exchequer George Osborne warned at the weekend that Europe has just six weeks to resolve its political crisis.

Insiders say there is disarray among Europe's leaders about the best way to contain the fallout from a Greek default. The European Central Bank would have to play a major role, but so far has intervened only reluctantly. Its president, Jean-Claude Trichet, has repeatedly insisted that a Greek default is unthinkable.

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