Bankers voiced relief on Monday after world leaders abandoned a global bank levy and eased the timetable for new capital requirements at a G20 summit in Canada which posed questions about the forum's effectiveness.
Shares climbed in Europe and Asia, led by banks, after the U.S. Congress adopted a landmark financial regulation package on Friday, removing uncertainty, and the G20 dropped a 2012 deadline for more stringent risk-provisioning rules.
We welcome the fact that the G20 has stepped away from imposing an arbitrary timeline for the implementation of new measures and has instead agreed to phase-in requirements agreements as and when national economic conditions allow, the International Banking Federation said in a statement.
Leaders of the main developed and emerging economies papered over differences on the right balance between reviving economic growth and cutting budget deficits at weekend talks in Toronto, in what was seen as a setback for U.S. President Barack Obama.
Unable to muster the unity of the past three crisis-era G20 summits, the leaders fell back on the Sinatra doctrine, leaving each country to do it my way, move at its own pace and adopt differentiated and tailored policies.
European leaders got what they saw as a green light to pursue austerity measures they consider essential to restore market confidence in the euro dented by the Greek fiscal crisis and wider concerns about high European sovereign debt.
To be honest, it was more than I expected, German Chancellor Angela Merkel said of the G20's non-binding pledge to halve budget deficits by 2013 and balance budgets from 2016.
The United States had pressed the Europeans before the meeting to avoid withdrawing economic stimulus measures prematurely and urged countries with current account surpluses such as Germany to boost domestic demand.
The positive outcome is that the European consolidation programs, which are moderate and appropriate given the confidence crisis in Europe, have been endorsed and accepted by others at the G20 level, Michael Heise, chief economist of Europe's biggest insurer Allianz, told Reuters.
The world's central bankers called on Monday for early and resolute steps to cut deficits, warning that global recovery could be derailed by surging interest rates unless industrial economies take determined action to reduce debt.
High and rising levels of public debt imply significant risks for the global economy, the Basel-based Bank for International Settlements said in a report.
France is likely to be the next European state to announce deficit-cutting steps this week, with the cabinet due to approve measures on Wednesday to curb public spending, and further cuts to be spelled out in September in a tough 2011 budget.
We have an untouchable goal to reduce the deficit level by two points from 8 percent to 6 percent next year. That's never been done before, Budget Minister Francois Baroin told France 2 television, adding the 2011 budget would be the most difficult in more than 30 years.
Meanwhile, several banking sources in Frankfurt said the European Union is preparing to stress-test more than 100 of the biggest EU banks in July, representing some 50 percent of each member state's banking balance sheet.
EU finance ministers are due to decide next week how many banks will be tested for their risk resilience, and on what criteria. EU leaders have agreed the results will be made public in an effort to restore market confidence.
In a sign markets are still nervous about euro zone debt, the premium investors charge to hold French, Belgian, Spanish and Italian bonds rather than benchmark German bunds rose to the highest levels since early June. The interest rates at which banks lend to each other in euros also rose.
The European Central Bank said it bought another 4 billion euros in euro zone government bonds last week, the lowest weekly sum to date, taking the total to 55 billion since it intervened on May 10 to halt contagion from Greece's debt crisis.
The Toronto summit exposed issues that are harder to resolve when countries loosely united in the G20 are emerging from the downturn at different speeds and with divergent priorities.
China avoided a scolding over the weak yuan, which has fueled its export boom, by announcing a more flexible foreign exchange regime a week before the summit and letting its currency rise by 0.5 percent against the dollar. But Beijing also refused to let the G20 praise it for the shift, insisting the issue had no place in international forums.
On trade liberalization, the G20 arguably moved backwards, dropping 2010 as the target date for concluding the long-stalled Doha round of World Trade Organization negotiations.
Opposition from Canada, Japan, Brazil and Australia, whose banks did not need state bailouts during the crisis, thwarted European calls for a common tax on banks to shield taxpayers from the costs of rescuing the financial sector.
On financial regulation, leaders endorsed a long phase-in for new Basel III bank capital and liquidity rules, allowing different speeds for different countries at the risk of encouraging regulatory arbitrage.
The outcome makes it more difficult to guarantee stability on financial markets if all the countries go their own direction, because you get the possibility of regulatory arbitrage in markets, Heise of Allianz said.
(Additional reporting by Arno Schuetze and Jonathan Gould in Frankfurt, Huw Jones, Steven Slater and Emilie Sithole-Matarise in London and Elizabeth Pineau in Paris; writing by Paul Taylor, editing by Sonya Hepinstall)