G20 battles to show markets Europe can save the euro

LOS CABOS, Mexico (Reuters) - World leaders tried on Tuesday 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 signaled it was considering euro-zone-wide integration of its banking sector, a major reform sought by the United States 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 7 percent, 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 IMF (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 added.

The dangers that Europe's escalating debt crisis would drive the global economy back into recession for the second time in less that four years dominated Monday's sessions among the G20 leaders of industrialized and developing nations, which represent over 80 percent of world output.

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 obtained by Reuters 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 U.S. 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."

It also said euro zone members would take "all necessary policy measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks."

(Writing by Stella Dawson; editing by William Schomberg)

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