By Patrick Wintour, Larry Elliott and Cannes
A WORLD recession has drawn closer after a fractious G20 summit failed to agree on fresh financial help for distressed countries and debt-ridden Italy was forced to submit to the International Monetary Fund monitoring its austerity program.
Financial markets fell sharply after the two days of talks in Cannes broke up in disarray, amid concerns that Italy will now replace Greece at the centre of Europe's deepening debt crisis.
Likely to go: George Papandreou.Credit: AFP
British hopes that the Germans would relent and allow the European Central Bank to become the lender of last resort for the euro were also dashed.
On a day of unremitting gloom and yet more market turbulence, Greek Prime Minister George Papandreou won a late-night confidence vote in parliament after making a speech in which he promised to start power-sharing talks to form a caretaker coalition government. Although he won the vote 153-145, he is now expected to step down and a national unity government is expected to take over in the coming days.
Stark warning: David Cameron.Credit: AP
In a sign that the spread of the debt crisis to Italy could break up the single currency, British Chancellor George Osborne admitted the Treasury was planning for a euro zone collapse.
The G20 deadlock led British Prime Minister David Cameron to issue one of his starkest warnings about the impact on the UK economy, saying: ''Every day the euro zone crisis continues and every day it is not resolved is a day that it has a chilling effect on the rest of the world economy, including the British economy.
''I am not going to pretend all the problems in the euro zone have been fixed. They have not. The task for the euro zone is the same as going into this summit. The world can't wait for the euro zone to go through endless questions and changes about this.
''We, like the rest of the world, need the euro zone to sort out its problems. We need more to happen in terms of detail on the European firewall.''
Mr Cameron hinted at worse to come, describing this as only ''a stage of the global crisis''.
There had been hopes that the G20 would agree to increase IMF resources by as much as $US250 billion ($A240.9 billion) to more than $US1 trillion, but disagreements about the wisdom of it, structure, size and contributors to the fund left world leaders forced to pass the issue on to a meeting of G20 finance ministers next February.
French President Nicolas Sarkozy had been eager to flourish a figure to reassure the markets and to top his chairmanship of the G20.
Mr Cameron revealed the friction, saying: ''The very worst thing would be to try to cook up a number without being very specific about who is contributing what. If you cannot do that, it is better to say the world stands ready to increase resources to the IMF as necessary.''
An early rise in share prices was reversed after it became clear that divisions in the G20 would prevent a deal in Cannes to boost the firepower of the European financial stability facility (EFSF) or the IMF. The yield on 10-year Italian bonds rose from 6.2 to 6.4 per cent, the highest since the euro was founded, raising fears that the country would face problems financing its debts.
US President Barack Obama, under pressure from Congress, was deeply reluctant to contribute to an expansion of IMF funds without clearer signs that the euro zone was sorting out its problems. He urged Greek and Italian parliaments to take action to control their deficits and also urged the euro area to start putting some resources into the EFSF, which Europe hopes to turn into a bailout fund with at least €1 trillion ($A1.3 trillion) to deploy.
But German Chancellor Angela Ms Merkel said: ''There are hardly any countries here that said they were ready to go along with the EFSF.''
GUARDIAN