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IMF to rescue eurozone from debt crisis?

World Monetary Fund President, Christine Lagarde, speaks to the media during a press conference at French finance ministry in Paris, Saturday, Oct. 15, 2011.
AP Photo/Michel Euler

PARIS - The finance chiefs of the world's leading economies opened the door Saturday for the International Monetary Fund to play a bigger role in fighting the eurozone's escalating debt troubles.

The Group of 20 rich and poor nations asked the IMF to draw up a list of new tools to stop countries under severe market pressure from toppling into a full-blown crisis that could have global repercussions.

That appeared to be targeted directly at Italy and Spain, the eurozone's third and fourth largest economies, which have seen their funding costs spike in recent months as worries over the currency union's ability to stomp out the crisis intensified.

"What has been asked of us is instruments that are more flexible, more short term, that allow countries in good economic health but in difficulty to resist," the IMF's managing director Christine Lagarde said after a two-day meeting of G-20 finance ministers and central bank governors in Paris.

She said G-20 leaders would consider the new tools at their summit in Cannes, France, early next month.

The IMF's investigation of new instruments is the biggest sign yet that the rest of the world is getting increasingly worried about the eurozone's debt crisis and may be prepared to pick up a bigger part of the costs of solving it.

"The risk outlook has darkened," Lagarde warned.

A failure of Europe to get a grip on the debt troubles of its countries could quickly lead to the collapse of banks across the continent and send shock waves through the rest of the world.

The G-20 also committed to making sure that the IMF has the resources it needs to stabilize the world economy, indicating that an increase in its funding was not being ruled out, although strong resistance to such a moved remained in several countries, including the United States.

Until now, the IMF has funded about a third of the bailouts of Greece, Ireland and Portugal, but helping the eurozone to stem contagion beyond those countries would require a broader use of resources that would go far beyond the fund's traditional role of providing rescue loans to cash-strapped governments.

Lagarde said the IMF's efforts would focus on "short-term liquidity instruments available to what we call the 'non-consenting' victims of the economic crisis."

She gave the example of precautionary credit lines the IMF offered to several countries after the collapse of U.S. investment bank Lehman Brothers in 2008, and said the new tools could go in a similar direction.

Precautionary credit lines are linked to fewer conditions than traditional IMF rescue loans that come only in return for radical economic reforms and painful budget cuts. That's why they would be aimed at countries that are fundamentally in decent health, but suffering from increased risk-adversity among investors.

Such flexible short-term loans could help Italy and Spain if they had to come up with billions of euros to recapitalize their banks, also reassuring private investors that they will get their money back.

However, a precondition to any expansion of the IMF's role is for the eurozone itself to take more radical action on stemming the crisis at a summit on Oct. 23.

At that meeting in Brussels, the currency union's leaders are expected to sign off on a scheme to maximize the impact of their euro440 billion ($600 billion) bailout fund, a plan to recapitalize banks across the continent to ensure they can withstand worsening market turmoil, and a second bailout for Greece.