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Wednesday, 19 October 2011

Ponzi

This article is about the businessman. For the fraudulent business scheme named after him, see Ponzi scheme.

Charles Ponzi
Ponzi in 1920
Born	March 3, 1882 Lugo, Italy
Died	January 18, 1949 (aged 66) Rio de Janeiro, Brazil
Charge(s)	Mail fraud (federal), larceny(state)
Penalty	5 years federal (served 3 and half years before facing state charge), 9 years state, deportation
Occupation	Confidence trickster
Spouse	Rose Gnecco
Parents	Roberto and Maria Ponzi

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 – January 18, 1949), commonly known as Charles Ponzi, was a businessman and con artist in the U.S. and Canada. Born in Italy he became known as a swindler in North America for his money making scheme. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. The term "Ponzi scheme" was coined because of it and the term now refers to scams which pay early investors out of the investments of later investors. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage.^[1]^[2] Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.^[3]

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[edit]Early life

Parts of Charles Ponzi's life are somewhat difficult to determine, owing to his propensity to fabricate and embellish facts. He was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi in Lugo in 1882. He told The New York Times that he had come from a well-to-do family in Parma, Italy.^[3] He took a job as a postal worker early on, but soon was accepted into the University of Rome La Sapienza. His friends considered the university a "four-year vacation," and he was inclined to follow them around to bars, cafés, and the opera.

[edit]Arrival in America

On November 15, 1903, he arrived in Boston aboard the S.S. Vancouver. By his own account, Ponzi had $2.50 in his pocket, having gambled away the rest of his life savings during the voyage. "I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me," he later told The New York Times.^[3] He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter, but was fired for shortchanging the customers and theft.

Ponzi aka "Charles Bianchi" under arrest circa 1910

In 1907, Ponzi moved to Montreal and became an assistant teller in the newly opened Banco Zarossi, a bank started by Luigi "Louis" Zarossi to service the influx of Italian immigrants arriving in the city. Zarossi paid 6% interest on bank deposits – double the going rate at the time – and was growing rapidly as a result. Ponzi eventually rose to bank manager. However, he found out that the bank was in serious financial trouble because of bad real estate loans, and that Zarossi was funding the interest payments not through profit on investments, but by using money deposited in newly opened accounts. The bank eventually failed and Zarossi fled to Mexico with a large portion of the bank's money.

Ponzi stayed in Montreal and, for some time, lived at Zarossi's house helping the man's abandoned family, while planning to return to the United States and start over. As Ponzi was penniless, this proved to be very difficult. Eventually he walked into the offices of a former Zarossi customer Canadian Warehousing and, finding no one there, wrote himself a check for $423.58 in a checkbook he found, forging the signature of a director of the company, Damien Fournier. Confronted by police who had taken note of his large expenditures just after the forged check was cashed, Ponzi held out his hands wrist up and said "I'm guilty." He ended up spending three years in the prison St. Vincent-de-Paul near Montreal. Rather than inform his mother of this development, he posted her a letter stating that he had found a job as a "special assistant" to a prison warden.

After his release in 1911 he decided to return to the United States, but got involved in a scheme to smuggle Italian illegal immigrants across the border. He was caught and spent two years in Atlanta Prison. Here he became a translator for the warden, who was intercepting letters from mobster Ignazio "the Wolf" Lupo. Ponzi ended up befriending Lupo. However it was another prisoner who became a true role model to Ponzi: Charles W. Morse. Morse, a wealthy Wall Street businessman and speculator, fooled doctors during medical exams, poisoning himself by eating soap shavings, toxins that left his body as quickly as the doctors left his bedside. Morse was soon released from prison. Ponzi completed his prison term the summer following Morse's release, having an additional month added to his term due to his inability to pay a $500 fine.

[edit]Origin of the term "Ponzi scheme"

After Ponzi's release from prison, he made his way back to Boston. There he met Rose Maria Gnecco, a stenographer, whom he asked to marry. Though Ponzi did not tell Gnecco about his years in jail, his mother sent Gnecco a letter telling her of Ponzi's past. Nonetheless, she married him in 1918. For the next few months, he worked at a number of businesses, including his father-in-law's grocery, before hitting upon an idea to sell advertising in a large business listing to be sent to various businesses. Ponzi was unable to sell this idea to businesses, and his company failed soon after.

A few weeks later, Ponzi received a letter in the mail from a company in Spain asking about the catalog. Inside the envelope was aninternational reply coupon (IRC), something which he had never seen before. He asked about it and found a weakness in the system which would, in theory, allow him to make money.

The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after World War I had greatly decreased the cost of postage in Italy expressed in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps of higher value, which could then be sold. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage, or profiting by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher, which is not illegal.

Seeing an opportunity, Ponzi quit his translator's job to set his scheme in motion. He borrowed money and sent it back to relatives in Italy with instructions to buy postal coupons and send them to him. However, when he tried to redeem them, he ran into an avalanche of red tape.

Undaunted, Ponzi went to several of his friends in Boston and promised that he would double their investment in 90 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. Some people invested and were paid off as promised, receiving $750 interest on initial investments of $1,250.

Soon afterward, Ponzi started his own company, the "Securities Exchange Company,"^[4] to promote the scheme. He set up shop in a building on School Street. Word spread, and investments came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was US$5,000, (approximately US$54,000 in 2008 dollars). By March, he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time, investors were being paid impressive rates, encouraging yet others to invest. By May 1920, he had made $420,000 ($4.59 million in 2008 terms).

He began depositing the money in the Hanover Trust Bank of Boston (a small bank on Hanover Street in the mostly Italian North End), in the hope that once his account was large enough he could impose his will on the bank or even be made its president; he did, in fact, buy a controlling interest in the bank (through himself and several friends) after depositing $3 million. By July 1920, he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.

Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only way Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.^[5]

Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts, with air conditioning and a heated swimming pool, and he maintained accounts in several banks across New England besides Hanover Trust. He also brought his mother from Italy in a first-class stateroom on an ocean liner. She died soon afterward.

[edit]Suspicion

Ponzi's rapid rise naturally drew suspicion. However, when a Boston financial writer suggested there was no way Ponzi could legally deliver such high returns in a short period of time, Ponzi sued for libel and won $500,000 in damages. As libel law in those days placed the burden of proof on the writer and the paper, this effectively neutralised any serious probes into his dealings for some time.

Nonetheless, there were still signs of his eventual ruin. Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture which he could not afford to pay for, sued Ponzi to cash in on the gold rush. The lawsuit was unsuccessful, but it did start people asking how Ponzi could have gone from being penniless to being a millionaire in so short a time. There was a run on the Securities Exchange Company, as some investors decided to pull out. Ponzi paid them and the run stopped. On July 24, 1920, the Boston Postprinted a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making $250,000 a day. Ponzi's good fortune was increased by the fact that just below this favorable article, which seemed to imply that Ponzi was indeed returning 50% return on investment after only 45 days, was a bank advertisement that stated that the bank was paying 5% returns annually. The next business day after this article was published, Ponzi arrived at his office to find thousands of Bostonians waiting to give him their money.

Despite this reprieve, Post acting publisher Richard Grozier and city editor Eddie Dunn were suspicious and assigned investigative reporters to check Ponzi out. He was also under investigation by the Commonwealth of Massachusetts, and on the day the Postprinted its article, Ponzi met with state officials. He managed to divert the officials from checking his books by offering to stop taking money during the investigation, a fortunate choice, as proper records were not being kept. Ponzi's offer temporarily calmed the suspicions of the state officials.

[edit]Collapse of the scheme

By this time, Ponzi was seeking another deal to get him out of trouble, but time was running out. On July 26, the Post started a series of articles that asked hard questions about the operation of Ponzi's money machine. The Post contacted Clarence Barron, the financial analyst who published the Barron's financial paper, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself was not investing with his own company.

Barron then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 actually were. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad. The gross profit margin in percent on buying and selling each IRC was colossal, but the overhead required to handle the purchase and redemption of these items, which were of extremely low cost and were sold individually, would have exceeded the gross profit.

The stories caused a panic run on the Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him. However, this attracted the attention of Daniel Gallagher, the United States Attorney for the District of Massachusetts. Gallagher commissioned Edwin Pride to audit the Securities Exchange Company's books—an effort made difficult by the fact his bookkeeping system consisted merely of index cards with investors' names.

In the meantime, Ponzi had hired a publicity agent, William McMasters. However, McMasters quickly became suspicious of Ponzi's endless talk of postal reply coupons, as well as the ongoing investigation against him. He later described Ponzi as a "financial idiot" who did not seem to know how to add.

The dénouement for Ponzi began in late July, when McMasters found several highly incriminating documents that indicated Ponzi was merely robbing Peter to pay Paul. He went to his former employer with this information. The paper offered him $5,000 for his story. On August 2, 1920, McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent. The article claimed that while Ponzi claimed $7 million in liquid funds, he was actually at least $2 million in debt. With interest factored in, McMasters wrote, Ponzi was as much as $4.5 million in the red. The story touched off a massive run, and Ponzi paid off in one day. He then sped up plans to build a massive conglomerate that would engage in banking and import-export operations.

However, trouble came from an unexpected quarter—Massachusetts Bank Commissioner Joseph Allen. An initial investigation into Ponzi's banking practices found nothing illegal, but Allen was afraid that if massive withdrawals exhausted Ponzi's reserves, it would bring Boston's banking system to its knees. When Allen found out a large number of Ponzi-controlled accounts had received more than $250,000 in loans, he ordered two bank examiners to keep an eye on Ponzi's accounts. On August 9, they reported that enough investors had cashed their checks on Ponzi's main account there that it was almost certainly overdrawn. Allen then ordered Hanover Trust not to pay out any more checks from Ponzi's main account. He also orchestrated an involuntary bankruptcy filing by several small Ponzi investors. The move forced Massachusetts Attorney General J. Weston Allen to release a statement that there was little to support Ponzi's claims of large-scale dealings in postal coupons. State officials then invited Ponzi note holders to come to the Massachusetts State House to furnish their names and addresses for the purpose of the investigation. On the same day, Ponzi received a preview of Pride's audit, which revealed Ponzi was at least $7 million in debt.

On August 11, it all came crashing down for Ponzi. First, the Post came out with a front-page story about his activities in Montreal 13 years earlier—including his forgery conviction and his role at Zarossi's scandal-ridden bank. That afternoon, Bank Commissioner Allen seized Hanover Trust after finding numerous irregularities in its books. Although the commissioner did not know it, this move foiled Ponzi's last-ditch plan to "borrow" funds from the bank vaults after all other efforts to obtain funds failed.

With reports that he was due to be arrested any day, Ponzi surrendered to federal authorities on August 12 and was charged with mail fraud for sending letters to his marks telling them their notes had matured.^[6] He was originally released on $25,000 bail, but after the Post released the results of the audit, the bail bondsman withdrew the bail due to concerns he might be a flight risk.

The news brought down five other banks in addition to Hanover Trust. His investors were practically wiped out, receiving less than 30 cents on the dollar. The Post won a Pulitzer Prize in 1921 for its exposure of Ponzi's fraud.

[edit]Prison and later life

Ponzi circa 1920

In two federal indictments, Ponzi was charged with 86 counts of mail fraud. At the urging of his wife, on November 1, 1920, Ponzi pleaded guilty to a single count before Judge Clarence Hale, who declared before sentencing, "Here was a man with all the duties of seeking large money. He concocted a scheme which, on his counsel's admission, did defraud men and women. It will not do to have the world understand that such a scheme as that can be carried out ... without receiving substantial punishment." He was sentenced to five years in federal prison.^[7]

He was released after three and a half years and was almost immediately indicted on 22 Massachusetts state charges of larceny.^[1] This came as a surprise to Ponzi; he thought he had a deal calling for the state to drop any charges against him if he pleaded guilty to the federal charges. He sued, claiming that as a federal prisoner he could not be tried by the state. The case, Ponzi v. Fessenden, made it all the way to the Supreme Court of the United States. On the 27th of March, 1922, the Supreme Court ruled that plea bargains on federal charges have no standing regarding state charges. It also ruled that Ponzi was not facing double jeopardy because Massachusetts was charging him with larceny while the federal government charged him with mail fraud (even though the charges implicated the same criminal operation).

In October 1922, he was tried on the first ten larceny counts. Since he was insolvent, Ponzi served as his own attorney and, being as persuasive as he had been with his duped investors, the jury found him not guilty on all charges. He was tried a second time on five of the remaining charges, and the jury deadlocked. Ponzi was found guilty at a third trial, and was sentenced to an additional seven to nine years in prison as "a common and notorious thief." ^[7]

After word got out that Ponzi had never obtained American citizenship (despite having lived in the United States for most of the time since 1903), federal officials initiated efforts to have him deported as an undesirable alien in 1922.^[8]

Ponzi was released on bail as he appealed the state conviction. He went to the Springfield neighborhood of Jacksonville, Florida and launched the Charpon Land Syndicate ("Charpon" is an amalgam of his name), offering investors in September 1925 tiny tracts of land, some under water, and promising 200 percent returns in 60 days.^[1] In reality, it was a scam that sold swampland in Columbia County.^[9] Ponzi was indicted by a Duval County grand jury in February 1926 and charged with violating Florida trust and securities laws. A jury found him guilty on the securities charges, and the judge sentenced him to a year in the Florida State Prison. Ponzi appealed his conviction and was freed after posting a $1,500 bond.

Ponzi traveled to Tampa,^[9] where he shaved his head, grew a moustache, and tried to flee the country as a crewman on a merchant ship bound for Italy. The ship, however, made one last American port call; he was caught in New Orleans and sent back to Massachusetts to serve out his prison term.^[1] Ponzi served seven more years in prison.

In the meantime, government investigators tried to trace Ponzi's convoluted accounts to figure out how much money he had taken and where it had gone. They never managed to untangle it and could conclude only that millions had gone through his hands.

Ponzi was released in 1934. With the release came an immediate order to have him deported to Italy. He asked for a full pardon from Governor Joseph B. Ely. However, on July 13, Ely turned the appeal down.^[10] His charismatic confidence had faded, and when he left the prison gates, he was met by an angry crowd. He told reporters before he left, "I went looking for trouble, and I found it."

Rose stayed behind and later divorced him in 1937,^[11] as she did not want to leave Boston. Rose, who later remarried, eventually became the bookkeeper for the New Cocoanut Grove Inc, the parent company of Boston's Cocoanut Grove nightclub.^[3]^[12]^[13]

In Italy, Ponzi jumped from scheme to scheme, but little came of them. He eventually got a job in Brazil as an agent for Ala Littoria, the Italian state airline.^[2] During World War II, however, Brazil sided with the Allies, and the airline's operation in the country was shut down. During that time, Ponzi also wrote his autobiography.^[14]

[edit]Death

Ponzi spent the last years of his life in poverty, working occasionally as a translator. His health suffered. A heart attack in 1941 left him considerably weakened. His eyesight began failing, and by 1948, he was almost completely blind. A brain hemorrhage paralyzed his right leg and arm. He died in a charity hospital in Rio de Janeiro, the Hospital São Francisco de Assis of Federal University of Rio de Janeiro on January 18, 1949.^[2]

Supported by his last and only friend who spoke English and had notions of Italian, the barber Francisco Nonato Nunes, was how Mr. Ponzi granted one last interview to an American reporter, telling him, "Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over."^[3]^[15]

Source: Wikipedia

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Christopher Tahir

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Monday, 17 October 2011

(BN) Germany Shoots Down ‘Dreams’ of Early End to Europe Sovereign-Debt Crisis

Bloomberg News, sent from my iPad.

Germany Shoots Down 'Dreams' of Swift Euro Crisis Solution

Oct. 17 (Bloomberg) -- Germany said European Union leaders won't provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

German Chancellor Angela Merkel has made it clear that "dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won't be able to be fulfilled," Steffen Seibert, Merkel's chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis "surely extends well into next year."

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe's emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline.

On the summit agenda is how any recapitalization of Europe's banks "might be carried out in a coordinated way" and how to make the European Financial Stability Facility, the EU's rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, he said.

The euro retreated from a one-month high against the dollar after Seibert's comments. The currency last week had its biggest gain in more than two years on speculation that policy makers were moving closer to stemming the crisis. German 10-year bonds rallied and the Stoxx Europe 600 Index reversed an advance of as much as 1.5 percent and was down 0.3 percent at 3:10 p.m. in Frankfurt.

Impressing Markets

While tensions "may die down if markets are suitably impressed" with the summit outcome, Merkel is seeking to keep pressure on euro-area countries to lock in budget discipline, Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a phone interview.

"For her, the longer-term reform is at least equally important" because it increases the chances "that the German taxpayer will get back all the money" put on the line in bailouts for Greece, Ireland and Portugal, he said.

Two years to the week since Greece triggered the turmoil by revising its budget math, policy makers face increasing calls from the U.S. and other global partners to stamp out the turmoil that has pushed the Greek government to the edge of default and the European economy close to recession.

The outlook for German economic growth has worsened as companies cut their business expectations and foreign orders decline, the Bundesbank, Germany's central bank, said in its monthly report today.

Greek Strikes

In Greece, Finance Ministry workers began a 10-day strike, complicating the government's efforts to collect taxes. Renewed walkouts have hit Europe's most-indebted country as Greek lawmakers face another vote on fiscal measures as soon as this week, a showdown that Prime Minister George Papandreou needs to win to ease the way for more foreign financing.

Obstacles to an EU accord include resistance by bankers to a deeper restructuring of Greek debt and discord among Europe's capitals over how to multiply the firepower of their bailout fund and recapitalize financial institutions. At stake is confidence in the 17-nation currency union that Merkel says she wants to preserve.

As EU officials move toward an agreement that may include bigger losses on Greek debt holdings and the forced recapitalization of lenders, bankers are pushing back. Options include altering a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings.

'Sustainable Solution'

German Finance Minister Wolfgang Schaeuble said yesterday the reduction of Greece's debt by means of private-investor participation must be bigger than agreed to in July by euro- region leaders to achieve a "sustainable solution" for the country. There will be negotiations with banks about a debt cut for Greece, Schaeuble said on ARD public television, according to a transcript of the interview.

Forcing lenders to boost capital would be counterproductive, and getting investors to accept larger losses Greek holdings difficult, Deutsche Bank Chief Executive Officer Josef Ackermann said on Oct. 13. Ackermann, who chairs the Washington-based Institute of International Finance and spearheaded the July accord, travels to Brussels this week for talks with policy makers.

Greek bond losses of as much as 50 percent envisaged in Europe's emerging plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, people familiar with the discussion said on Oct. 14.

Five-Point Plan

In the works for the summit is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the 440 billion-euro ($611 billion) EFSF, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty changes to tighten economic management.

"The problems in the eurozone are chronic" and "won't go away," said Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC.Roubini. He said EFSF needs to be more than four times its current size to be effective.

Even so, leaders won't present a "definitive solution" for the euro region's debt crisis at the summit in Brussels, Reuters cited Schaeuble as saying at a tax advisers' conference in Dusseldorf today.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Christopher Tahir

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(BN) EU Given One Week to Fix Crisis as G-20 Warns World Economy Is Threatened

Bloomberg News, sent from my iPad.

EU Given One Week to Fix Crisis as G-20 Warns of Threat to World

Oct. 17 (Bloomberg) -- European leaders have one week to settle differences and flesh out a strategy to terminate their sovereign debt crisis as global finance chiefs warn failure to do so would endanger the world economy.

Group of 20 finance ministers and central banks concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

"The risk of a recession would be increased dramatically were the Europeans to fail to accomplish goals that they've set for themselves," Canadian Finance Minister Jim Flaherty said after the G-20 meeting, which ended Oct. 15.

Two years to the week since Greece triggered the turmoil by revising its budget math, the inability of policy makers to stamp it out has pushed the Greek government to the edge of default and the European economy close to recession. Optimism before the G-20 meeting that authorities may finally devise a solution helped to propel the MSCI World Index higher for a third week, paring its decline since the start of August to about 9 percent.

Disagreements

Hurdles to overcome for an accord include resistance from bankers to a deeper restructuring of Greek debt as well as disagreements between Europe's capitals over just how to multiply the firepower of their bailout fund and recapitalize financial institutions. Greece's parliament faces another tight vote on new fiscal measures as soon as this week, a showdown that Prime Minister George Papandreou needs to win to ease the way for more foreign financing.

The Brussels meeting "has the potential to turn into a positive historic moment," Joachim Fels, London-based chief economist at Morgan Stanley, wrote in a note to clients yesterday. "But it could also easily turn into a negative catalyst."

Europe's plan, which has still to be made public, includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and magnifying the strength of the 440 billion-euro ($611 billion) temporary rescue fund known as the European Financial Stability Facility, people familiar with the matter said last week.

"The plan has the right elements," U.S. Treasury Secretary Timothy F. Geithner said in Paris. "They clearly have more work to do on the strategy and the details."

Cannes Summit

The G-20 officials -- who met to prepare for a Nov. 3-4 gathering of leaders in Cannes, France -- said in a statement that the world economy faces "heightened tensions and significant downside risks." European authorities must "decisively address the current challenges through a comprehensive plan," they said.

The policy makers held out the possibility of rewarding European action with more aid from the International Monetary Fund, while splitting over whether the Washington-based lender's $390 billion war chest needs topping up.

Europe's latest strategy hinges on putting Greece, whose government forecasts its debt to reach 172 percent of gross domestic product in 2012, on a sustainable path. Austerity has plunged the country deeper into recession and provoked civil unrest that threatens political stability.

Greek Tensions

Papandreou faces the latest test of his party's unity as soon as this week when he asks Parliament to approve steps including bigger pension and wage cuts as well as plans that may lead to the dismissal of 30,000 state workers. One ruling party lawmaker, Thomas Robopoulos, said he may quit his seat ahead of the vote, exposing the tensions in Papandreou's socialist party. It has 154 seats in the 300-member chamber.

Failure to limit the risk of a default to Greece led to Portugal and Ireland requiring bailouts, and markets are now targeting larger debt-strapped nations such as Italy. Investors are concerned that if the crisis keeps festering, the world economy could face a repeat of the chaos that followed the 2008 collapse of Lehman Brothers Holdings Inc. The euro area is already set to suffer a renewed recession, say economists at JPMorgan Chase & Co. and Goldman Sachs Group Inc.

"We're aware of our responsibility," German Finance Minister Wolfgang Schaeuble said in Paris. "We'll solve the problems in the euro zone."

Crisis Plan

In the works is a five-point plan foreseeing a fix for Greece, boosting of the rescue fund, fresh capital for banks, a new push to increase competitiveness and consideration of European treaty amendments to tighten economic management.

Proposals include revising a voluntary July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. One variant would take that reduction up to 50 percent, and a more aggressive suggestion is for investors to exchange Greek bonds for new debt at a lower face value collateralized by the euro area's AAA-rated rescue fund, the people said. The ultimate choice is a restructuring involving writedowns without collateral.

Highlighting potential opposition from bankers this week, Charles Dallara, managing director of the Institute of International Finance, told the Financial Times in an article published Oct. 15 that he doesn't "see a compelling case" to reopen the July deal. The imposition of greater losses on investors may prompt them to sell other European bonds, he said. The European Central Bank has also signaled it doesn't favor a rewrite of the three-month old accord.

Bank Liabilities

The bank-aid model under discussion is to set up a European-level backstop capitalized by the EFSF, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities. Such ideas are controversial in Germany, which has called for recapitalization on a country-by-country basis.

European Union Economic and Monetary Affairs Commissioner Olli Rehn told Bloomberg Television on Oct. 15 that euro-area authorities are "close" to a pact. Banks may be required to maintain a 9 percent capital buffer to absorb sovereign risks, up from the 5 percent core capital level used in July's stress tests, a person with knowledge of discussions said last week.

How to magnify the strength of the EFSF may also sow discord this week. Options include enabling it to borrow from the ECB or using it to partly insure new bonds issued by distressed governments. The ECB has all but ruled out the first method, making bond guarantees more likely, the people said.

Bond Guarantees

The guarantees of new bonds sold by distressed euro-area governments might range from 20 percent to 30 percent, a person familiar with those deliberations said.

Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified "interim" period, the people said. ECB President Jean-Claude Trichet, who attended his last G-20 meeting before he retires Oct. 31, reiterated the central bank hopes to stop purchasing government bonds once the EFSF is able to take over.

A consensus is nevertheless emerging to accelerate the birth of a permanent aid fund by a year to July 2012. This week's discussions will also look at easing unanimity rules that permit solitary countries to block bailouts.

Morgan Stanley's Fels said the steps could backfire because investors may fail to be lured by the guarantees, harsher writedowns could spark contagion and banks would likely prefer to sell assets and reduce leverage than raise capital. What's really required is leaders to take a "big step" toward fiscal integration, he said.

The coming weekend "is the moment people are expecting something quite impressive," U.K. Chancellor of the Exchequer George Osborne said in Paris.

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net Theophilos Argitis in Paris at targitis@bloomberg.net James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net James Hertling at jhertling@bloomberg.net

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Best Regards,

Christopher Tahir