G20 ramps up pressure on Europe over debt crisis

LOS CABOS, Mexico (Reuters) - World leaders pressured Europe on Monday to take ambitious new steps to resolve its debt crisis after a victory for pro-bailout parties in a Greek election failed to calm markets or ease worries that wider turmoil could derail the global economy.

The world's major industrialized and developing economies were set to urge Europe to take "all necessary policy measures" to resolve a crisis that has now raged for over two years, according to a draft communiqu? seen by Reuters that was prepared for a Group of 20 summit in this Mexican resort town.

U.S. President Barack Obama, concerned Europe's woes could upend his re-election hopes, requested a meeting with its leaders on Monday evening.

Earlier he met with Germany's Angela Merkel, who as the leader of Europe's biggest economy is under intense pressure to explore bold new short-term measures, but has so far resisted. Obama's spokesman said the U.S. president was encouraged by the talks, which touched on steps to "increase European integration".

European officials rejected the notion that they were to blame for weakening growth across the globe, and played down hopes for any quick miracle cure for the 17-nation euro zone.

"Frankly, we are not coming here to receive lessons in terms of democracy or in terms of how to run our economy," said European Commission President Jose Manuel Barroso.

Protected by Mexican navy vessels and troops on sun-baked beaches and highways, leaders from the Group of 20 countries representing more than 80 percent of world output began a two-day meeting to prioritize growth and job creation against a backdrop of a weakening global economy.

Rising violence in Syria and the near-collapse of a United Nations-brokered peace plan was also in focus as U.S. President Barack Obama met with Russian President Vladimir Putin. The two super powers have clashed over arming Syria and U.N. sanctions.

Obama and Putin agreed that the violence in Syria has to end but offered no new solutions and showed no signs of reaching a deal on tougher sanctions against Damascus.

But Europe's battle against a debt crisis that has led Greece, Ireland and Portugal to seek EU/IMF rescues, and forced Spain to seek aid for its banks, was set to dominate an opening discussion of G20 leaders on the global economy.

The World Bank lowered its forecast for global growth in 2012 to 2.5 percent and warned that developing countries faced a long period of financial market volatility and weaker growth.

RELIEF RALLY FLEETING

A narrow victory for the conservative New Democracy party in the Greek election on Sunday eased concerns the heavily indebted country could exit the euro zone soon but did little to calm financial markets.

After an initial relief rally, the euro fell against the dollar and Spanish bond yields hit a new euro-era high above 7 percent. European stocks ended 1.2 percent lower.

Fitch Ratings agency said the Greek result had lowered the risk of a disorderly default and the scenario of a euro zone exit, but it also warned that any new government in Athens was likely to be fragile.

"The win in Greece does not really resolve anything," said Boris Schlossberg, managing director at investment advisory firm BK Asset Management in New York. "It's still going to be tough for Greece."

Merkel, speaking to reporters after landing on the southern tip of Mexico's Baja California peninsula in the middle of the night, welcomed the Greek result but said she could not accept any loosening of the austerity measures and deep structural reforms Athens has agreed to as a condition of its two EU/IMF bailouts totaling 240 billion euros.

"The Greek government will and must deliver on the commitments it has agreed to," she said.

That puts her on a collision course with the winner of the Greek vote, conservative Antonis Samaras, who campaigned pledging to renegotiate elements of the rescue and reiterated that stance on Monday, saying "amendments" were needed to relieve "crippling unemployment and huge hardships" for Greeks.

Greece will ask to spread 11.7 billion euros in austerity cuts over four years instead of two, a New Democracy party source told Reuters in Athens.

German frustration with Greece's failure to deliver on its reform pledges has risen in recent months, as has Greek anger at the tough austerity prescribed by Berlin and its partners.

In a twist of fate, Greece's soccer team will battle Germany later this week in the quarter-finals of the European championships.

David Mackie, an economist at JP Morgan, said he expected European governments would ultimately be forced to agree to an "aggressive restructuring" of the loans they have already provided to Greece to return the country to a sustainable path.

"PERPETUAL STAGNATION"

Merkel also faces intense pressure to take stronger action for the broader bloc.

But she has rejected calls for joint euro zone bonds and the creation of a "banking union" in Europe with cross-border deposit guarantees, dismissing these as quick fixes that are bound to fail and would be rejected by German courts.

Instead, she is pushing fellow European leaders to agree a road map toward closer fiscal integration that would involve ceding sovereignty over budgets to Brussels and giving more power to the European Parliament.

By sketching out what the bloc might look like in five to 10 years, she hopes to win back the confidence of markets.

But her counterparts, notably new French President Francois Hollande, have doubts about transferring fiscal powers, and it appears unlikely that Europe will deliver a "grand bargain" at a separate summit of EU leaders on June 28-29.

In Los Cabos, leaders are set to confirm they will double the IMF's firepower with an extra $430 billion in loans even though some emerging nations are frustrated with the slow pace of winning more power at the global lender.

The G20 leaders are also expected to adopt a Los Cabos Action Plan, pledging to promote economic growth and jobs, investing in infrastructure and promoting trade, while sticking to its pledges to bring down budget deficits.

"Strong, sustainable and balanced growth remains the top priority of the G20 as it leads to higher job creation and increases the welfare of people across the world," the draft communiqu? reads. "We are committed to adopting all necessary policy measures to strengthen demand, support global growth and restore confidence."

(Additional reporting by G20 team in Los Cabos, and Gertrude Chavez-Dreyfuss in New York.; Writing by Noah Barkin and Stella Dawson; Editing by William Schomberg and Padraic Cassidy)

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