Reuters (Link) - Axel Bugge and Sebastian Tong (March 13, 2009)
More spending will give only a brief "sugar high" if G20 nations fail to clean up their banks, the World Bank said on Friday 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.
HOST PLAYS DOWN DIFFERENCES
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."
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 industrialized 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 on Friday 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 checkbook is being eyed now too.