Finance ministers and central bankers from the Group of 20 nations met in Paris on Oct. 14-15 in an attempt to prevent Greece’s sovereign bond crisis from worsening a European financial crisis. In their joint statement, they called on euro-zone nations to recapitalize euro-zone banks.

The joint statement also praised the efforts by the 17 euro-zone countries to improve the flexibility of the European Financial Stability Facility, a fund designed to rescue the euro zone. Since Slovakia had earlier approved a euro-zone plan to strengthen the EFSF after it once rejected it, the euro zone is now well prepared to get over the crisis.

The joint statement said, “We look forward to further work to maximize the impact of the EFSF in order to avoid contagion, and to the outcome of the European Council on Oct. 23 to decisively address the current challenge through a comprehensive plan.”

This shows that the United States, Japan and emerging economies are looking seriously at the European financial crisis. The participants in the Paris meeting shared a view that the crisis in Europe and confusion in the international financial markets are causing downward risks to the global economy.

The European crisis is not limited to Greece. The credit rating of Italy and Spain has been cut. The Franco-Belgian bank Dexia, which has been suffering from markdowns on Greek debts, has collapsed.

To help solve the Greek debt crisis, a default of 50 percent of Greek debt is also being contemplated. Germany is reported to be positive about this idea. But France is taking a careful stance because the 50 percent “haircut” will damage many French banks which hold large amounts of Greek bonds. Germany is reported to be reluctant about recapitalization of banks because it would increase Germany’s financial burden.

But there is not much time left to prevent a worsening of the European financial crisis. If European financial institutions collapse one after another, loans to business enterprises will be squeezed and they may go bankrupt in the manner of a chain reaction. This would plunge the world economy into great confusion.

The European Council needs to take bold measures to build a firewall to contain the European financial crisis, including greatly expanding the size of the EFSF, currently €440 billion, so that it can prop up banks and buy euro-zone bonds.

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