International bankers called on Group of 20 finance leaders on Friday to step up their efforts to promote economic growth, warning that spillover risks from the euro zone remain.
While the latest Greek rescue package is a major step forward that will help reduce uncertainty, the sovereign debt crisis remains unresolved and overly rapid fiscal cutbacks damage the short-term outlook, the Institute of International Finance said on the eve of the G20 finance meetings here.
Policymakers should work on reducing euro-area strains, take a more balanced approach toward financial regulation and step up their policy coordination to improve the global growth outlook, the IIF said in an open letter to the G20.
It welcomed the important progress Europe has made so far in addressing its sovereign debt problems through an emergency bailout fund, central bank liquidity, and toughened fiscal rules. But budget cutbacks in weaker countries could result in higher debt-to-GDP ratios.
While necessary, fiscal austerity will in the short term weigh on already sub-par growth, it said.
Mitigating the impact of fiscal austerity is key, the IIF said. It proposed a slower pace of budget consolidation in countries that have the room, and a pooling of fiscal burden to help weaker countries as the euro zone moves toward a closer fiscal union.
The IIF, which represents 450 banking and insurance institutions world wide and is a premier lobby group for the banking industry, said it was concerned that new financial regulations could exacerbate a creditless recovery in the wake of the financial crisis.
Credit conditions in Europe have deteriorated and are weak in the United States, it said.
We remain concerned about the potential for well-intentioned regulatory reforms to results in excessive private sector deleveraging, it said.
Although a degree of financial and household sector balance sheet adjustment clearly has been necessary, policies that promote further deleveraging at this time should be reconsidered.
The bankers group requested the Financial Stability Board postpone at least until January 2018 implementing new bank capital surcharges.
It also said regulations require better international coordination. In the United States the Volcker Rule, which prohibits banks backed by public funds from trading for their own account, need revision. In the United Kingdom, ring-fencing retail banking and increasing capital buffers could greatly constrain credit both domestically and overseas, it said.
There remains a risk that increasingly elaborate regulatory structures being put in place may act to increase systemic risk rather than reduce it, the IIF letter said.
Against this uncertain backdrop, the G20 needs a more robust framework for policy coordination, the IIF said.
It requires the fuller participation and more active role by leading emerging economies and deeper commitment by developed markets on working toward resolving global imbalances, it said.
In particular, it singled out the need for the United States to address its budgetary problems, which are festering and overhang the global outlook.
Credible plans from U.S. policymakers for medium-term fiscal consolidation and tax reform could avoid untimely near-term fiscal contraction and leave room for monetary policy to remain supportive for longer, the IIF said.
(Reporting By Stella Dawson; Editing by Chizu Nomiyama)