G7 crisis talks as eurozone storm clouds darken

Finance chiefs of the G7 group of industrial nations have held emergency talks about the eurozone debt crisis.

It comes amid fresh worries about the eurozone's economy, underlined in data showing that private sector activity, including in Germany, fell in May.

The talks ended without a G7 statement, but Japan's finance chief vowed a "speedy" response to the crisis.

Jun Azumi was quoted by news agencies as saying: "We were able to share our recognition on the European issue."

He added: "The European side stated that they will respond to it speedily."

The teleconference of finance ministers and central bank chiefs came just a few days after US President Barack Obama blamed Europe for slow growth in the US economy.

With mounting concern about Spain's economy, there is speculation that Europe remains split over a clear way forward, especially on whether to launch common bonds to help ease borrowing costs.

But Germany repeated its position that fiscal union must precede the introduction of eurobonds.

Wolfgang Schaeuble, Germany's finance minister, said in an interview with the Handelsblatt newspaper on Tuesday: "The government has always said that before we start talking about joint debt management, we need real fiscal union."

The subject of eurobonds, which would consolidate eurozone debt and reduce the interest rate countries must pay to borrow money, was a divisive issue at a European Union summit last month.

G7 countries outside the eurozone fear Europe's failure to get to grip with its worsening financial position will be a drag on global recovery.

Speaking to reporters ahead of the G7 talks, Canada's Finance Minister, Jim Flaherty, said Europe was "the real concern right now".

'Three months left'

There was concern that some eurozone countries "have not taken sufficient action yet to address those issues of undercapitalisation of banks and building an adequate firewall", he told the Reuters news agency.

Spain's banking crisis and worries that Greece may be forced to leave the euro bloc have caused panic in the financial markets in the past few weeks. And now there are fears Cyprus may be forced to join Greece, the Republic of Ireland and Portugal in seeking a bailout.

Billionaire investor George Soros told a conference in Italy over the weekend that Europe had about "three months to save the euro", but that leaders did "not understand the nature of the crisis".

What could happen next if Greece leaves the eurozone?

There is more and more speculation that Greece is about to leave the euro. The country has been unable to form a government, and new elections seem set to give power to parties that reject the spending cuts that have been agreed with other eurozone governments and the International Monetary Fund. But without those spending cuts, the Greek government will receive no more bailout loans, it won't have the money to pay its debts, the Greek banks will probably go bust, and the European Central Bank may be forced to cut Greece loose from the single currency. What would this mean for Greece and the rest of Europe?

• Business bankruptcies

Greek businesses face a legal and financial disaster. Some contracts governed by Greek law are converted into drachmas, while other foreign law contracts remain in euros. Many contracts could end up in litigation over whether they should be converted or not.

Greek companies who still owe big debts in euros to foreign lenders, but whose main sources of income are converted to devalued drachmas, will be unable to repay their debts. Many businesses will be left insolvent - their debts worth more than the value of everything they own - and will be facing bankruptcy. Foreign lenders and business partners of Greek companies will be looking at big losses.

• Recession

Crisis-stricken eurozone banks may be forced to slash their lending. Businesses, afraid for the euro's future, may cut investment. Faced with a barrage of bad news in the press, ordinary people may cut back their own spending. All of this could push the eurozone into a deep recession.

The euro would lose value in the currency markets, providing some relief for the eurozone by making its exports more competitive in international trade. But the flipside is that the rest of the world will become less competitive - especially the US, UK and Japan - undermining their own weak economies. Even China, whose economy is already slowing sharply, could be pushed into a recession.