With Greece, Ireland and Portugal all under international bailout programmes, financial markets are anxious about the risks from a seething Spanish banking crisis and a June 17 Greek election that may lead to Athens leaving the euro zone.

“Markets remain skeptical that the measures taken thus far are sufficient to secure the recovery in Europe and remove the risk that the crisis will deepen. So we obviously believe that more steps need to be taken,” White House press secretary Jay Carney told reporters.

Canadian Finance Minister Jim Flaherty said ministers and central bankers of the United States, Canada, Japan, Britain, Germany, France and Italy would hold a special conference call, raising pressure on the Europeans to act.

“The real concern right now is Europe of course – the weakness in some of the banks in Europe, the fact they’re undercapitalised, the fact the other European countries in the euro zone have not taken sufficient action yet to address those issues of undercapitalisation of banks and building an adequate firewall,” Flaherty told reporters.

The disclosure of the normally confidential teleconference came as European Union paymaster Germany said it was up to Spain, the latest euro zone country in the markets’ firing line, to decide if it needed financial assistance, after media reports that Berlin was pressing Madrid to request aid.

German Chancellor Angela Merkel and leaders of her centre-right coalition said in a statement: “All the instruments are available to guarantee the safety of banks in the euro zone.”

They effectively ruled out Spanish calls to allow euro zone rescue funds to lend money directly to recapitalise Spanish banks, which are weighed down with bad property debts, without the government having to take a bailout programme.

Berlin is pressing reluctant euro zone partners, including close ally France, to agree to give up more fiscal sovereignty as part of a closer European fiscal union.

A G7 source, speaking on condition of anonymity because of the sensitivity of the issue, said there were concerns about the risk of a bank run in Spain, which is struggling to recapitalise nationalised lender Bankia and smaller banks stricken by the collapse of a property bubble.

“There is concern on whether there will be a bank run in Spain that could have repercussions beyond the euro zone,” the source told Reuters.

The United States, which holds the G7 chair, has long pressed Europe to deal more forcefully with its crisis. President Barack Obama, seeking re-election in November, has pointed to Europe’s crisis as a problem for the weakening U.S. economic recovery.

“European leaders appear to be moving with a heightened sense of urgency,” a U.S. Treasury Department official said.

“We’re hoping to see accelerated European action over the next several weeks, including in the run-up to the Leaders’ G20 meeting in Mexico,” the official said, referring to a summit of the Group of 20 leading economies in Mexico on June 18-19.

“Movement to strengthen the European banking system will be of particular importance in this time period.”

SPAIN TO TEST MARKET

Spain’s borrowing costs have soared to around 6.6 percent for 10-year bonds with the risk premium over safe haven German Bunds reaching a euro era record. Madrid plans to issue 1-2 billion euros in 10-year debt on Thursday in a key market test.

The United States has said it is unwilling to provide more money to the International Monetary Fund, which could support the euro zone, and the G7 source said there was little prospect of the global community acting as one to contain the crisis.

A senior Brazilian official added to the pressure on Europe and in particular Germany. “We insist in our position that European countries with enough space to stimulate the economy, even via fiscal stimulus (not many that can do that), should do it now,” said the official, referring mostly to Germany.

The euro climbed and safe-haven U.S. and German bonds eased off last week’s record low yields as speculation mounted that authorities will act to overcome the crisis.

EU leaders hold a summit on June 28-29 and their chairman, Herman Van Rompuy, said he would put forward a roadmap for closer economic union by the end of 2012.

He said he would present the main building blocks at the summit, including banking integration proposals on “supervision, on deposit insurance and on resolution”.

Germany, keen to limit liabilities for its taxpayers as the biggest contributor to euro zone rescue funds, has so far rejected proposals for a banking union with a joint deposit guarantee and a common resolution fund for failing banks.

Officials say such measures can come only at the end of a drive to closer fiscal union.

Before meeting European Commission President Jose Manuel Barroso in Berlin, Merkel said they would consider the “medium-term goal” of the need to put systemically important banks under a European supervisory authority.

“The world wants to know how we conceive the political union that will accompany monetary union, and we have to provide an answer to this question in the foreseeable future,” she said.

Underscoring how complex the process of deeper political union in Europe is likely to be, a German government paper seen by Reuters said Germany does not expect Europe to take any final decisions on strengthening economic policy coordination between member states until the spring of next year.

CHINA EYES GREEK EXIT

China, another major G20 power, has instructed key agencies including the central bank to come up with plans to deal with potential economic risks of a Greek withdrawal from the euro zone, three sources with knowledge of the matter told Reuters.

The plans may include measures to stabilize the yuan currency, increase checks on cross-border capital flows and policies to stabilise China’s economy, they said.

Euro zone officials have sought to persuade Beijing, which has vast foreign currency reserves mostly in U.S. Treasury bonds, to back the euro zone by buying its troubled countries’ bonds. But Chinese officials have been reticent, concerned at the risks and mindful of Chinese public criticism.

In a ray of light, Portugal’s international lenders said its year-old bailout plan was on track, boosting Lisbon as it seeks to avoid following Greece into a second rescue package. DM

Photo: U.S. Treasury Secretary Tim Geithner (R) listens as Canada’s Finance Minister Jim Flaherty speaks during a news conference at the G7 finance ministers’ meeting in Iqaluit, Nunavut February 6, 2010. REUTERS/Chris Wattie