Act now to save global recovery: IMF chief
Act now to save global recovery: IMF chief
European leaders are fighting over who should pay the bill for taming a raging sovereign debt crisis.

Wyoming: The new head of the IMF on Saturday called on global policymakers to pursue urgent action, including forcing European banks to bulk up their capital, to prevent a descent into a renewed world recession.

"Developments this summer have indicated we are in a dangerous new phase," International Monetary Fund Managing Director Christine Lagarde said at a conference for top officials and leading economists from around the globe.

"The stakes are clear; we risk seeing the fragile recovery derailed. So we must act now," she said.

Two years after the end of the worst of the financial crisis, growth in the United States and Europe is sputtering as government debt burdens surge.

Borrowing costs for European banks are rising as lenders balk at providing any but the shortest maturity funds on fears over bank exposure to shaky euro zone sovereign debts. Sharp swings in global financial markets have intensified strains.

Complicating the picture is policymaker indecision on both sides of the Atlantic.

European leaders are fighting over who should pay the bill for taming a raging sovereign debt crisis.

In the United States, lawmakers and President Barack Obama fought a contentious budget battle earlier this summer that resulted in the loss of the nation's coveted 'AAA' debt rating from Standard & Poor's.

Federal Reserve Chairman Ben Bernanke warned here on Friday that the fight had shaken confidence and sapped US growth.

'Mandatory substantial recapitalization'

Lagarde said the Group of 20 leading economies should use a meeting in November to address the global economy's woes in a convincing fashion, and she used her speech - her first major policy address since taking the helm at the IMF in July - to open a new front in dealing with strains at European banks.

She called for a "mandatory substantial recapitalization," through private channels if possible, but otherwise through some form of public, Europe-wide funding, such as the European Financial Stability Facility.

Lagarde also warned advanced economies away from tightening their belts so fast that it imperils recovery.

"Put simply, macroeconomic policies must support growth," the former French economy minister said. On Friday, she made the same point in a phone conversation with US President Barack Obama, in which the White House said they agreed on the need for policies to spur job creation.

"Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation," Lagarde said, adding that central banks should stand ready to jump back into unconventional policy actions if needed.

In his speech on Friday, Bernanke stopped short of promising the Fed would resume the bond buying that has been the centerpiece of US monetary policy for the last few years, but he said the central bank would discuss options for further easing, and the need for it, at its next meeting in September.

European Central Bank President Jean-Claude Trichet, who appeared alongside Lagarde, emphasized the need to safeguard price stability as a foundation for healthy growth.

"It is something we consider absolutely essential for confidence," he said.

Lagarde suggested a fractured political process in Europe was contributing to insecurity.

"Europe must recommit credibly to a common vision, and it needs to be built on solid foundations - including, for example, fiscal rules that actually work," Lagarde said.

Trichet echoed that theme.

"We are ourselves challenged paradoxically not necessarily -- as a group, as an entity -- because our fundamentals are very bad. Our fundamentals are not very bad," he said. "The problem is that we are challenged in our governance."

European bank stress

Lagarde said shoring up European banks was key to "cutting the chains of contagion" in the continent's spreading debt crisis.

European banks have been under pressure to raise more capital after stress tests last month showed a potential vulnerability to losses on European sovereign debt, particularly Greek bonds.

The cost of insuring against bank defaults in Europe - as indicated by the iTraxx senior financial CDS index - has soared high above levels seen in early 2009 when the financial crisis was reaching its apex.

Lagarde said individual European countries must also put in place deficit-cutting plans with a "credible finance path" - including continued support from the ECB.

In the United States, the focus on long-term fiscal consolidation must not ignore the importance of fostering near-term growth, she said.

"After all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?" she asked.

Policymakers must also stop the slide in the US housing market, which is dragging on consumer spending and slowing the recovery, Lagarde added. The nation could turn to intervention by government housing finance agencies and more aggressive programs to reduce homeowner debt, she said.

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