European sovereign debt

The rescue of the debt-laden economies like Greece, Ireland and Portugal seemed to be settled a few months ago. No longer.

There is a growing belief that Greece is going to have to restructure its debt as its economy continues to shrink as a result of stiff austerity measures demanded by lenders.

Greece, Ireland, Portugal and Spain have combined outstanding debt of about $2 trillion and a large proportion of that debt is held by European banks, according to estimates from Desmond Lachman, resident scholar at the American Enterprise Institute

Restructuring would mean extending the length of time Greece has to pay off the bonds, or even forcing lenders to write-off some of the debt.

But officials with the European Central Bank and other stronger economies are strongly opposed to such proposals.

America's debt crisis

"Restructuring is not a solution, it's a horror story," Christian Noyer, governor of the Bank of France and a member of the ECB board, told reporters Tuesday, according to numerous press reports. He said if Greece fails to meet the terms of its bailout agreed to a year ago, Greek government debt will be "ineligible as collateral" at the ECB, which would spark a European banking crisis.

But protests against the austerity required under the bailout are rising in Greece, and voters in other European countries are also pushing back against the measures. Spain's ruling party lost elections over the weekend.

Jurgen Stark, the ECB's chief economist, recently warned that if a country like Greece defaulted on its sovereign debt, it could trigger a banking crisis worse than what happened after the collapse of Lehman Brothers, as it quickly spreads to countries like Ireland, Portugal and Spain.

U.S. economic policy: The meeting also comes as the United States grapples with its own deficit debates, and Democrats and Republicans wrestle over raising the debt ceiling, which the federal government hit last week. Some fear that if the two sides can't reach an agreement by early August, it could result in a doomsday scenario in which the government cannot pay what it owes.

Also, since the last time the leaders met, Standard & Poor's lowered its outlook for U.S. sovereign debt to negative, meaning it was at risk of a future downgrade.

IMF leadership

The arrest of Dominique Strauss-Kahn in New York last week has thrust the issue of IMF leadership to the forefront much sooner than expected. Europeans quickly aligned behind the candidacy of French Finance Minister Christine Lagarde as his successor. Traditionally a European has led the global agency charged with rescues of troubled economies and currencies.

But many in the developing world are pushing for a new director from an emerging market, arguing that the post should not automatically go to a European.

American leaders have so far tiptoed around the issue, saying they want to see a quick but open succession process.

As the crisis in Europe escalates, Americans will come under pressure by their European allies at the meeting to back Lagarde, and make a swift change in leadership.