U.S. President Barack Obama (R) meets with Russia's President Vladimir Putin in Los Cabos, Mexico, June 18, 2012. The leaders are in Los Cabos to attend the G20 summit. REUTERS/Jason Reed (MEXICO - Tags: POLITICS TPX IMAGES OF THE DAY)

Tony Czuczka and Sandrine Rastello Los Cabos, Mexico

Group of 20 (G20) leaders focused their response to Europe’s financial crisis on stabilising banks as the International Monetary Fund (IMF) raised its lending capacity to shield the rest of the world economy.

Emerging countries boosted their pledges to the IMF’s global firewall, almost doubling the fund’s resources to $456 billion (R4 trillion), at a G20 summit in Mexico dominated by the global effort to restore confidence in the euro.

US President Barack Obama and German Chancellor Angela Merkel, facing pressure from the US and fellow European leaders to do more to stem the crisis, met before the summit after trading accusations in recent weeks over responsibility for the turmoil.

“The president was encouraged by what he heard regarding ongoing discussions in Europe about the paths they are pursuing to address the crisis,” White House spokesman Jay Carney said during the summit in Los Cabos on Monday.

An after-dinner meeting of Obama and the leaders of the four participating euro zone countries – Germany, France, Italy and Spain – was cancelled after summit participants agreed that they had spent enough time on the crisis, an official from a G20 nation familiar with discussions said.

China, Brazil, Mexico, India and Russia announced contributions to the IMF to bolster a “second line of defence”, fund managing director Christine Lagarde said in a statement. China would contribute $43bn, the official Xinhua News Agency reported. The others’ share was $10bn each.

“There is concern that the firewall available may not be adequate to deal with contagion,” Indian Prime Minister Manmohan Singh said at the summit. “The resources currently expected to be mobilised by Europe and the IMF are less than was estimated a year ago, and the crisis is actually more serious.”

G20 chiefs met as Spain’s borrowing costs soared to a euro era record and elections in Greece failed to damp the threat of contagion. While Merkel rejects pooling euro zone debt or boosting deficit spending, Obama has blamed the financial crisis in the biggest economic bloc for slowing US employment growth.

Europe was making an effort to “break the feedback loop” between banks and government debt, the link that is worsening Spain’s woes, the US Treasury Department’s top international negotiator, Lael Brainard, said.

“We’re seeing a notable shift in European discussion” toward spurring economic growth and “laying out a path to financial union”, she said.

The euro zone’s G20 governments will commit to protecting the currency union, according to an excerpt of a draft of the statement that leaders will issue at the summit’s close.

Euro zone members of the G20 “will take all necessary policy measures to safeguard the integrity and stability of the area, improve financial markets and break the feedback loop between sovereigns and banks”, according to the draft provided by an official from a G20 government who asked not to be identified.

With EU leaders preparing to discuss the path to closer political and economic union at a summit in Brussels on June 28 to 29, Merkel has distanced herself from proposals for a banking union. She said last week that steps such as jointly insuring deposits and joint euro area bonds couldn’t replace budget discipline and increased competitiveness.

The euro extended declines on Monday as Spanish 10-year bond yields leapt above the 7 percent level that forced Greece, Ireland and Portugal to call for outside aid. That stoked speculation Spain may need to request a sovereign bailout after the government called for as much as e100bn (R1 trillion) to shore up its blighted banks.

G20 leaders are in Los Cabos for their second consecutive summit to be dominated by the crisis as the respite in markets after a victory for the pro-bailout New Democracy party in Greek elections on Sunday proved short-lived.

China and Indonesia set the tone by signalling growing exasperation with more than two years of European crisis-fighting that has failed to stem the threat of global contagion.

European leaders said they alone were not responsible for a slowing global economy. Italian Prime Minister Mario Monti said the crisis “had its origins in imbalances in other countries, including the US”. – Bloomberg