Finance leaders clashed on Friday over how to stop banks plunging the world into another crisis.

While new International Monetary Fund forecasts obtained by Reuters showed the world economy looks finally on the mend, G20 policymakers gathered in London are divided on how to ensure any recovery lasts and bankers don't run riot with risk again.

They all agree economic life-support packages have to stay in place for now, but a G7 source told Reuters France and Germany oppose a U.S. plan to get banks to hold more capital. The Europeans also want much tougher curbs on bankers' pay and France is pressing for strict limits.

Public opinion in most European countries, including at home, here in the UK and in the United States, has been flabbergasted, horrified by the amount of compensation paid, French Economy Minister Christine Lagarde said.

U.S. Treasury Secretary Timothy Geithner has called for strengthened bank capital requirements aimed at curbing some of the risky lending practices blamed for the crisis. Lagarde said she could not see the point.

British finance minister and meeting host Alistair Darling told Reuters he supported the U.S. plan but admitted there were differences between policymakers. He said it was more important that no country was complacent about the recovery despite signs the world economy is healing.

The IMF now forecasts the world economy to shrink 1.3 percent in 2009, a shade less than its April forecast of a 1.4 percent contraction, and grow 2.9 percent in 2010, revised up from 2.5 percent previously.

But policymakers are cautious about declaring victory yet, especially given most major economies are only expected to post sluggish growth next year, with Germany remaining in recession, while layoffs are set to increase.

People are at risk of saying the job's done, now we can throttle back, Darling told Reuters. We've made those mistakes before -- most notably, in America, in the late 1930s, (they) called it wrong and got themselves back into a recession again.


More than two years of financial upheaval have left deep economic scars in many countries. With unemployment high and banks reluctant to lend, growth may be subdued for a while, putting pressure on governments to maintain supports.

What financial markets want to know is when they can expect governments to start withdrawing the trillions of stimulus pumped into economies, or raise interest rates. For now officials are only willing to talk about developing strategies with little clarity on when they may be applied.

G7 sources have told Reuters that the G20's communique, due on Saturday, will likely maintain the pledge to keep policy accommodative for as long as was needed.

Unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and unemployment, IMF chief Dominique Strauss-Kahn said at a conference in Berlin.

Leaders from Brazil, Russia, India and China, the four emerging markets that comprise the BRIC economies, met with Geithner on Friday, They called in a communique for a more powerful voice in the global financing agencies -- the IMF and World Bank -- than the United States and EU have so far offered.


Once the recovery is firmly on track, banking regulations are likely to become more restrictive. Geithner called on Thursday for higher capital levels at all banks and even more stringent requirements for those that could pose a threat to overall financial stability.

He wants international agreement by the end of next year, with new standards implemented by the end of 2012.

ING analyst Rob Carnell said that while tighter capital rules were probably not a bad idea, clamping down could constrict lending and put a heavy burden on banks struggling to recover from heavy losses.

Raising capital requirements for banks to levels that will provide a much deeper buffer against future asset crises may also make it harder for a repeat of this crisis, but when capital is still being eaten up with rising default and delinquency rates, it is a very tough hurdle for banks to clear, he said.

It is also totally at odds with governments' other demands that banks increase lending, he added.

(Additional reporting by Sujata Rao, Carolyn Cohn, Tamawa Desai, Sebastian Tong, Paul Carrel, Huw Jones, Tom Bergin and Noah Barkin in Berlin, Krista Hughes in Frankfurt, writing by Sumeet Desai and Emily Kaiser, editing by Patrick Graham)