Show leadership or risk slump, Darling warns

With the International Monetary Fund, World Bank and G20 finance ministers meeting in Washington, Mr Darling said world leaders should follow the example set by Gordon Brown in 2008, when the bank bailout was agreed.

Share prices fell today, before closing slightly up, because of market fears that the Greek debt crisis could spread to other European countries without concerted political action. There is also anxiety over future economic growth in Europe and the US, as well as the financial health of Europe’s banks.

Mr Darling said the threats to the world economy and financial system were “as serious” as 2008, with consequences that could be “more far-reaching”. Three years ago, the Labour government had ensured that world leaders did “what was necessary to stop recession becoming depression”.

It just takes political will and leadership. Former chancellor Alistair Darling

Mr Darling added: “When we did the banking bailout over a weekend in discussions with my fellow ministers, we actually came to the conclusion we should all do the same thing and we did it in a matter of days. It’s not rocket science, it’s not impossible, it just takes political will and leadership and that’s what we’re desperately lacking at the moment.

“If you wait until you’re right on the brink, the risk is eventually you run out of control. That’s almost where we got to in 2008. Fortunately we brought it back from the brink, but now we’re in a similar situation and without the leadership I think is necessary, then we could be in for a very difficult time and it’s totally unnecessary. The real danger is you crash things and end up going into another recession.”

There are dark clouds over Europe. IMF chief Christine Lagarde

The head of the IMF, Christine Lagarde, echoed Mr Darling’s concerns, saying: “Today if there is no collective, rapid action, we run the risk of losing the battle for growth. There are dark clouds over Europe and there is huge uncertainty in the United States… we could risk a collapse in global demand.”

Speaking in Washington, Chancellor George Osborne said: “What is required now is a sense for the markets that there is enough government or central bank firepower to deal with that situation and I think the euro zone is very well aware of that.”

Greek default

The initial rally in share prices was dampened by reports that Greece, whose debts have led to the turmoil in the European markets, was considering defaulting on its borrowings.

Finance Minister Evangelos Venizelos was quoted by two newspapers as saying that an orderly default could resolve the country’s problems. Greek bank shares fell 9 per cent as a result.

In another sign that a default is looking more likely, a member of the European Central Bank’s governing council, Klaas Knot, said this option could not be ruled out.

“It is one of the scenarios,” he told the Dutch newspaper Het Financieele Dagblad. “All efforts are aimed at preventing this, but I am now less certain in excluding a bankruptcy than I was a few months ago.” Mr Knot said he wondered “whether the Greeks realise how serious the situation is”.

Olli Rehn, the EU’s economic affairs commissioner, said everything possible was being done to prevent a disorderly default. But he did not rule out the restructuring of the debt.

Greece has taken tough action to control its debts, including raising taxes, cutting spending and making 30,000 public sector workers redundant. It is trying to secure the release of the next tranche of money – 8bn euros – it needs to keep going.

Banks under pressure

With bank shares falling, the IMF is working on the assumption that Europe’s financial institutions may need an injection of 200bn euros. But many analysts believe they need more money than this.

The European Commission said European banks had already received 420bn euros since 2008 and were in much better financial health than three years ago.

Share prices rose slightly when the markets opened after the G20 said it would “take all necessary actions to preserve the stability of the banking system and financial markets as required”.

Following talks in Washington, the group of leading economies said eurozone countries would make the 440bn euro European bailout fund more flexible. Although this helped to stabilise the markets when trading began, this optimism did not last long.

It is unclear what is being considered. The US believes the fund should be expanded, but in Germany there is a reluctance to commit more money to support countries, like Greece, that are considered profligate.

The latest market turbulence was prompted by warnings from the IMF, World Bank and Federal Reserve on 22 September that growth is under threat. Ms Lagarde said the economy was entering a “dangerous place”, while World Bank president Robert Zoellick said it was in the “danger zone”.