G20 urges Europe to take "all necessary measures" on crisis

LOS CABOS, Mexico (Reuters) - World leaders pressed Europe on Monday to do whatever it takes to combat the euro zone's debt crisis after a victory for pro-bailout parties in a Greek vote reduced the chances of a euro breakup but failed to calm financial markets.

The world's major industrialized and developing economies are set to urge the euro zone to break the vicious link between its struggling banks and strained state finances, according to a draft communiqu? prepared for the G20 summit and seen by Reuters.

It said Europe would take "all necessary policy measures" to resolve its crisis and said Group of 20 leaders looked forward to the euro zone working closely with a new Greek government to keep it on a reform path and in the currency bloc.

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

Escalating violence in Syria and the near-collapse of a United Nations-brokered peace plan will also be in focus when U.S. President Barack Obama meets with Russian President Vladimir Putin on the sidelines of the summit on Monday. The two super powers are clashing over arming Syria and U.N. sanctions.

But Europe's progress toward lasting solutions for its debt crisis will be the focal point when G20 leaders hold their opening session on the global economy in the afternoon.

Obama spoke with European leaders after the Greek vote and requested a meeting with them on Monday evening, underscoring the concern in Washington that the euro crisis could deepen, infecting a fragile U.S. economy only months before an election.

He was also due to hold separate talks with German Chancellor Angela Merkel, who, as the leader of Europe's biggest economy, faces enormous pressure to take bold new steps to resolve a crisis that has been raging for more than two years.

Obama, speaking in Los Cabos, welcomed Greece's election result as positive for forming a new government that could work well with international partners involved in its debt crisis, such as the International Monetary Fund.

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.

The euro fell from a one-month high against the dollar and Spanish bond yields shot above 7 percent to their highest level since the creation of the single currency in 1999, despite agreement earlier this month on an aid package of up to 100 billion euros to shore up the country's ailing banks.

Greek stocks rallied 3.6 percent on the day, but euro zone blue chips ended 1.2 percent lower.

Fitch Ratings agency said the Greek result had lowered the risk of a disorderly default and euro zone exit, but also warned that any new government 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 peninsula in the middle of the night, said she could not accept any loosening of the austerity measures and deep structural reforms Greece has agreed to as a condition of its two EU/IMF bailouts totaling 240 billion euros.

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

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 face 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.

ECB Executive Board member Joerg Asmussen said giving Greece more time to meet its financial targets, as German Foreign Minister Guido Westerwelle suggested on Sunday, would require its partners to stump up even more money.

"As long as a country is running a primary deficit, extending the fiscal targets will automatically mean that there will be an additional external financing need," he said in Berlin.

"PERPETUAL STAGNATION"

Beyond Greece, Merkel faces intense pressure to take stronger action for the broader bloc but has rejected calls for joint euro zone bonds and the creation of a "banking union" in Europe with cross-border deposit guarantees, saying quick fixes 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.

British Prime Minister David Cameron was poised to warn euro zone leaders in Los Cabos they faced "perpetual stagnation" without bold new measures, according to extracts of a speech provided before delivery.

World Bank President Robert Zoellick called it "an absolutely critical time" and warned Europe not to squander this opportunity for decisive action.

Europe's debt crisis has underscored the need for a bigger war chest at the IMF. 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, according to the G20 source.

"We are committed to adopting all necessary policy measures to strengthen demand, support global growth and restore confidence."

(Additional reporting by Gernot Heller, Jeff Mason and Lesley Wroughton 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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