The euro zone debt crisis will dominate a summit of G20 finance chiefs and central bank heads in Paris, with a downgrade of Spain's credit rating highlighting the risk of a much larger economy than Greece coming under threat.
French and German officials are trying to put flesh on the bones of a crisis resolution plan in time for a European Union summit on Oct. 23 and parallel discussions are taking place on the need to give the International Monetary Fund more firepower.
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South Africa's finance minister said the IMF and euro zone's EFSF rescue fund were ill equipped to deal with a worsening euro crisis that spreads beyond Greece.
"The resources available in the EFSF and IMF are not adequate if the contagion is going to spread any further," Pravin Gordhan said in Paris.
Fears about the damage a default by Greece -- and possibly others -- could inflict on the financial system have driven a confidence-sapping bout of market volatility since late July, with global stocks falling 17 percent from their 2011 high in May.
Underlining the challenge for European policymakers, Standard and Poor's cut Spain's long-term credit rating, citing the country's high unemployment, tightening credit and high private sector debt.
"This meeting takes place in a context where the absolute priority for the success of the G20 is to find the elements for the stability of the euro zone," a source at the French finance ministry said.
With impatience growing, finance chiefs from outside the bloc are expected to speak frankly.
"This meeting is an important staging point before (a Nov. 3/4 G20 leaders summit in) Cannes and a valuable opportunity to put pressure on the euro zone," said a non-euro zone G20 delegate.
Unlike in 2009 when the G20 launched coordinated stimulus to pull the world out of crisis, the rest of the world is chafing at Europe's slow response while Washington and Beijing are sparring over the yuan currency.
A Franco-German crisis plan is likely to ask banks to accept bigger losses on their Greek debt than the 21 percent spelled out in a July plan for a second bailout of Athens, which now looks insufficient.
"It will be more, that's more or less certain," French Finance Minister Francois Baroin, who is hosting the Paris talks, said in an interview on Europe 1 radio.
It should also lay out a system for recapitalising banks and plans to leverage the euro zone's European Financial Stability Facility to give it more punch.
Japanese Finance Minister Jun Azumi said he would share with his G20 counterparts Japan's "bitter experience" of failing to contain its 1990s banking crisis by doing too little, too late.
Whilst the EFSF has the resources to cope with bailouts for Greece, Portugal and Ireland, it would be overwhelmed by the need to rescue a bigger economy such as Italy or Spain which have come under market attack.
"We see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners," S&P said.
The most effective method would be to turn the EFSF into a bank so it could draw on European Central Bank resources. Both Germany and the ECB are opposed to that.
The G20 may refer to the euro crisis in its communique and in closing news conferences on Saturday evening, but little else of substance is likely to be inked in with the EU summit in nine day's time the make-or-break moment.
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G20 sources said most BRICS economies were in favour of bolstering the IMF's capital as a crisis-fighting tool.
"We have said this before and have conveyed this again, that if emerging economies and the BRICS are called upon to contribute, we can do it via the International Monetary Fund," one of the sources said. "India is open to it, China and Brazil are also okay with the idea."
The United States insists the IMF has plentiful resources.
Another G20 source said the IMF would present a plan which had broad support to its executive board to make short-term credit lines available to fundamentally healthy countries hit by liquidity crises. It could aid euro zone countries hit by the current crisis of confidence in the bloc's sovereign debt.
The Paris meeting may give the green light to regulators for new rules on banks deemed 'too big to fail', including capital surcharges, due to be officially approved in Cannes.
Any real progress on bigger goals such as setting parameters to measure global imbalances and reining in speculative capital flows is unlikely to come before a Nov. 3-4 summit in Cannes, where France passes the G20 baton to Mexico.
The French finance ministry source said that for Cannes, France hoped to have two or three measures agreed for countries showing imbalances: consolidation measures for those with high deficits and stimulus measures for those with surpluses.
"We are going to try to make some progress and obtain, perhaps not tomorrow or Saturday but by Cannes, a list of measures country by country," he said. "These must be measures which will have an impact on the real economy."
A separate G20 source said after preparatory talks late on Thursday that China would commit in Paris to boost its consumption through a five-year plan, via households and companies as well as infrastructure.
The G20 countries make up 85 percent of global output.
An April G20 meeting placed seven large economies under review -- the debt-burdened United States, export driven China and the economies of France, Britain, Germany, Japan and India. Officials have said privately the aim was to get Beijing to discuss the yuan, and China's cooperation is essential to the success of the process.
But the euro zone crisis has derailed French President Nicolas Sarkozy's hopes of using his G20 presidency to launch a fundamental rethink of the global financial system and its reliance on the U.S. dollar.
China and the United States sparred this week over a U.S. Senate bill to press Beijing to raise the yuan's value, and the issue is likely to create a sideshow at the G20 talks, even if the euro zone crisis pushes it off centre stage. (Additional reporting by Randall Palmer, David Milliken, Kevin Yao and Abhijit Neogy; Writing by Mike Peacock; editing by Janet McBride)