LOS CABOS: World leaders tried yesterday to convince financial markets that Europe can move fast enough toward a major overhaul of its banking systems that could help fix its debt crisis and restore confidence in a faltering global recovery.
At a Group of 20 leaders summit, Europe signalled it was considering euro zone-wide integration of its banking sector, a major reform sought by the US and other nations to break the cycle of highly indebted countries rescuing failing banks, which only pushes governments ever deeper into debt.
But the news that the G20 was readying a firm statement for restoring global growth and jobs, along with Europe's pledge of action, brought little relief to investors.
Risks grew that Spain, the euro zone's fourth-largest economy, would need a full-blown international bailout as its short-term borrowing costs jumped about two percentage points and longer-term debt yields hovered above seven per cent, heightening the danger it would be locked out of credit markets.
French President Francois Hollande said he and German Chancellor Angela Merkel, central players in a crisis that has run for more than two years, were both aware that the euro zone was responsible for providing the solutions.
"Mrs Merkel and I know that Europe must have its own response," he said on the sidelines of the G20.
"It must not be given to us from the outside."
"The International Monetary Fund is not there to backstop the euro zone even if it has done so for some countries, as we saw in Greece," he said.
Under pressure from financial markets and anxious world leaders, Europe agreed on Monday to move towards a more integrated banking system.
Among commitments in a draft G20 communique was a pledge to consider concrete steps towards a "more integrated financial architecture" in Europe that would include common banking supervision and guarantees for bank depositors.
A G20 official said there was no guidance from European leaders or officials about any time frame for such a plan.
Diplomats said that US President Barack Obama carefully spelled out to fellow leaders the interlinked nature of the global economy with each region heavily dependent on demand from the European Union, the world's largest economic bloc, for their exports.
The draft communique showed the G20 leaders were poised to pledge that they would "act together to strengthen recovery and address financial market tensions."
Spain, meanwhile, lurched closer to becoming the largest euro zone country yet to be shut out of credit markets when it had to pay a euro era record price to sell short-term debt yesterday.
The soaring borrowing costs showed that a euro zone deal to lend Spain up to 100 billion euros ($126bn) for its banks had not solved the country's problems or restored investor confidence and suggests more aid may be needed fix its finances.
They also illustrated how Europe's troubles run much deeper than Greece, brought back from the brink of default by Sunday's parliamentary election that has cleared the way for a renegotiation of the terms of its bailout package.
The two-and-a-half year old debt crisis has hobbled the global economy and world leaders meeting in Mexico piled pressure on the euro zone to move towards a fiscal and banking union to fix the crisis that now threatens to engulf Spain.