World Bank urges divided G20 to fix banks

HORSHAM, England, (Reuters) – More spending will  give only a brief “sugar high” if G20 nations fail to clean up  their banks, the World Bank said yesterday as economic powers  struggled to agree a response to the worst downturn in decades.

The comments went to the heart of a rift between Washington,  which is pushing for governments to spend more, and European  capitals, which want rapid moves to tougher market regulation in  addition to massive public expenditure.

G20 finance ministers and central bankers were meeting in  the south of England under pressure to resolve differences and  pave the way for concrete advances when world leaders meet on  the economic crisis in London on April 2.
Some progress is being made though.

Switzerland, Austria and Luxembourg offered on Friday to  relax strict bank secrecy in some tax evasion cases.
G20 leaders are also expected to back a call to as much as  double the money the International Monetary Fund has at its  disposal to help emerging economies hit by a plunge in global  demand for exports and a severing of credit lines.

However, Brazilian Finance Minister Guido Mantega, attending  the talks in southern England, said the IMF would not get extra  money from China, India, Russia or his own country until their  voting power at the finance agency rose.

The G20 meetings are also tasked with delivering on pledges  made in November to improve market regulation, tighten up on tax  havens and also deal with the toxic assets — mostly mortgage  debt-related derivatives — that sparked the credit crisis.
“If you don’t take on the banking issue, the stimulus is  just like a sugar high,” World Bank chief Robert Zoellick, who  was in Britain for the meetings, told reporters.

“It pushes some energy into the system but then you get the  letdown unless you reopen the credit markets,” he said.
Japanese leaders sided with the U.S. push for more spending  but the unity of the group of developed and developing nations  looked seriously compromised after Paris accused Washington of  disregarding the urgent need for tough market regulation.

“The United States is insisting on the need for a strong,  rapid and coordinated stimulus. Why? Because they were the last  ones to put in place their plan and they are facing a bigger  crisis,” French Finance Minister Christine Lagarde said.

“For most of the countries in continental Europe, the  urgency is to develop the rules, highlight discipline and  sanctions through a new architecture of the financial system,”  she said in an interview in Les Echos newspaper.

China said it too was ready to do more if needed to spur its  growth. British Finance Minister Alistair Darling, hosting the  weekend’s meeting, played down the importance of any rift.

“Obviously if you have 20 people sitting round a table,  there will be differences,” he told Reuters. “There is a lot of  common ground. If you take fiscal stimulus, for example, the  U.S. has, we have, the French have, the Germans have.”

Great Recession
The world economy shrank for the first time since 1945 in  the last quarter of 2008, throwing millions of people out of  work, and the IMF says 2009 will bring the first annual global  contraction for more than 60 years.

While financial markets have lately taken some comfort from  signs that large U.S. banks may survive without full government  takeovers, a solution to the core problem of what to do with a  mountain of troubled banking assets is proving elusive.
Financial markets are awaiting detailed U.S. plans on that.

Washington is in the meantime urging the big industrialised  countries to spend 2 percent of their gross domestic product to  boost demand and economic activity, but France and Germany say  they will not spend more than announced for now.
Meeting host Darling said: “We must do three things: boost  demand, reform the global system of financial regulation, and  increase the resources of the International Monetary Fund.”

Top White House economic adviser Lawrence Summers called yesterday for the United States to lead a global drive to boost  regulatory standards.

“Globally, the United States must lead a leveling-up of  regulatory standards, not as has happened all too often in the  recent past, trying to win a race to the bottom,” Summers said  in a speech in Washington.

A document obtained by Reuters this week showed that the EU  may be willing to grant up to another $100 billion to the IMF to  help severely distressed countries. Japan has already committed  $100 billion, and China’s chequebook is being eyed now too.

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