European debt crisis puts surplus in jeopardy

The Gillard Government is bracing for a massive financial upheaval that could put its pledge to get the Budget back in surplus in jeopardy, with Greece almost certain to default on its €350 billion ($483 billion) debt.

As financial ministers from around the world, including Treasurer Wayne Swan, worked through the weekend at a G20 finance ministers meeting in Washington, there were growing fears the world had entered more dangerous times than at the height of the 2008 global financial crisis.

Germany and France have begun work on a strategy, amid warnings that the eurozone's sovereign debt crisis is spiralling out of control.

Their aim is to build a "firebreak" around Greece, Portugal and Ireland to prevent the crisis spreading to the ailing economies of Italy and Spain, nations considered "too big to bail".

Global leaders have piled pressure on European countries to fix their problems to avoid plunging the world back into recession.

The G20 nations set themselves a six-week deadline to resolve the crisis and to unveil a solution by the next summit in Cannes on November 4. The new plan being considered includes recapitalising Europe's banks with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis.

Mr Swan warned that leaders of the world's developed economies were in a "sober" mood as they assessed the grim financial outlook in Europe and the US. He said leaders he had met understood the world economy was facing a "pretty serious situation".

He said the crisis would likely reach Australia, even though economic fundamentals were strong.

Asked about the Federal Government's pledge that it would return the Budget to surplus by 2012-13, Mr Swan appeared to signal it might have to shift on that timeframe given the global uncertainly.

"We have to play with the cards that we are dealt," he said.

"We are determined to come back to surplus, but I just make the observation that these events globally have an impact upon global growth, that has an impact upon domestic growth, that has an impact on revenue and of course it makes it tougher to come back to surplus."

The Opposition is insisting the Budget is returned to surplus.

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