IMF chief Lagarde urges action on banks’ capital

“Developments this summer have indicated we are in a dangerous new phase,” International Monetary Fund Managing Director Christine Lagarde said at the Jackson Hole, Wyoming, 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 on Friday that the fight had shaken confidence and sapped US growth.

Ms Lagarde said the G20 economies should use a meeting in November to address the global economy’s woes in a convincing fashion, and she used her speech to open a new front in dealing with strains at European banks.

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

Ms 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.

In his speech on Friday, Mr Bernanke stopped short of promising the Fed would resume the bond buying that has been the centrepiece 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.

Ms 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,” she said.

She added that shoring up European banks was key to “cutting the chains of contagion”.