Stock markets perked up 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 and the G20 dropped a 2012 deadline for banks to adopt more stringent risk-provisioning rules.
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 endorsed an early drive for deficit cutting, 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 on Monday.
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.
Prime Minister Francois Fillon said last week the government might have to reduce tax breaks next year by 8.5 billion euros rather than the 5 billion initially targeted. Budget Minister Francois Baroin said at the weekend he was looking for up to 10 billion euros in savings on tax breaks.
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, Baroin told France 2 television, adding the 2011 budget would be the most difficult in more than 30 years.
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.
G20 VALUE QUESTIONED
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.
While the International Banking Federation welcomed the more flexible timeline, Heise of Allianz warned: 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.
But the central unresolved rift was over the pace of fiscal consolidation after governments in the industrialized world ran up huge debts and deficits coping with the crisis.
While Obama masked his disappointment diplomatically, others were more critical of Europe's German-led austerity drive.
If European countries proceed with their fiscal austerity plans, the global economic turnaround may slow down, said South Korean President Lee Myung-bak, who will chair the next G20 summit in Seoul in November.
Analysts said the meager summit outcome raised doubts about the G20's value as a forum for managing the world economy.
The G20 is fragmented as it transitions out of its role as a crisis-fighting committee, said Tom Bernes, vice-president of the Center for International Governance Innovation in Toronto.
While G20 leaders agree on the need for stronger financial regulation, actual details continue to be vague and lacking a solid deadline.... There is a huge unfinished agenda.
(Additional reporting by Lesley Wroughton, Simon Rabinovitch and Brad Whitehouse in Toronto, 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)