By Brai Odion-Esene

WASHINGTON (MNI) – The global economy is at serious risk of seeing
landmark agreements between nations to cooperate over fiscal policy and
financial reform being “pulled apart” by the unilateral and in some
cases self-serving policies now being implemented by some countries, the
chief spokesman for an international banking group warned Monday.

Despite some “buoyancy” been seen in the global economy —
particularly in emerging markets — Charles Dallara, managing director
of the Washington-based Institute of International Finance, described
the outlook for the global economy as “somewhat troubled.”

This is because the world is entering a “worrisome” phase, he told
reporters during a briefing ahead of the International Monetary Fund and
World Bank annual meetings. He cited a growing lack of coordination
among the major economies over fundamental macroeconomic policies as
well as exchange rate policy.

Dallara was especially critical of U.S. lawmakers and their
drafting of the Dodd-Frank financial reform bill, saying they made
little effort to coordinate provisions with other countries that also
have major financial sectors. The IIF represents about 420 banks
worldwide.

The idea that a large global financial institution can be wound
down with a national law “lacks credibility,” he said, adding, the
answer is not to go down the route of “nationally-oriented” responses.

That concern has led the IIF to focus its message to the world’s
policymakers on the need for a core group of the world’s leading
economies — China, the European Union, Japan and the United States —
to come together and “hammer out some understandings,” Dallara said.

Such understandings should address tensions over exchange rate
policies that have been evident in recent months, he said. But any
agreement on exchange rate policy should not be the end of it as while
exchange rates are a key instrument of adjustment, they are also just
representations of underlying structural phenomena in economies which
need to be addressed.

So any agreements reached by the core group must extend to the full
range of national, structural and exchange rate issues that surround and
will shape the outlook for the global economy, Dallara said.

He noted that the IIF expects global growth to moderate in 2011,
expanding by 2.7% compared to 3.4% this year. All major economies are
expected to see slower growth next year, although Japan — 1.0% rise in
GDP from a 3.0% in 2010 — is projected to experience the most
pronounced slowing.

The Euro Area is projected to grow by 1.4% in 2011 after a 1.7%
expansion this year.

The U.S. economy on the other hand will see 2.3% growth in 2011,
the IIF projects, a slight dip from the 2.8% growth projected for this
year. It expects the “moribund” housing market to cast a shadow over the
health of the consumer and financial system.

China’s economic growth will also be strong next year, the IIF
said, despite a slight dip, expanding by 8.3% after 8.5% this year.

Latin America is expected to slow more appreciably, seeing 4.3%
growth for all of 2011 after 5.7% expansion in 2010.

The question looming for policy officials ahead of the IMF meeting
this week, and G20 meetings in coming weeks, Dallara said, “is whether
they can recapture not only the spirit, but the committment to
coordination … and if so, are they prepared to back it up” with
meaningful committments on fiscal issues, structural reforms and
exchange rate policies.

The IIF believes this is needed to create a more coherent framework
for the global economy over the next few years, he said.

Hung Tran, IIF deputy managing director, told reporters it is
particularly important that mature economies coordinate plans to get
their budget deficits and public debts under control.

Countries should not run out and “front load” their fiscal
consolidation plans at the same time, which Tran warned would amplify
the contractionary impact on an already faltering global economy.

“The right way is to do it in a coordinated fashion,” he said,
urging countries with serious deficit problems to develop credible
medium-term plans to get both their deficit and debt ratios down. And
then, using the credibility attained from the medium-term proposal,
those countries can, at a more measured pace, implement deficit
reduction in the short-term.

Tran argued such an approach is warranted so as not to intensify
current headwinds against growth.

Dallara also sounded a warning over the approach being utilized by
various national regulators in implementing financial regulatory reform.
“It appears that here again, the commitment to coordination is beginning
to lag,” he said.

He noted that recent statements from the Basel Committee have been
quickly followed by statements of individual national regulators and
central bankers, “who have indicated their intentions to pursue capital,
liquidity, or other policies which are in variance with those of the
Basel Committee.”

An expert panel appointed by the Swiss government Monday proposed
that international banking giants Credit Suisse and UBS should boost
their capital in common equity to 10% by 2019, a stiffer requirement
than the one contained in the Basel III accord announced last month.

Tougher capital standards than foreseen in the new Basel III
regulation are aimed at addressing the too-big-to-fail problem that has
been a particular concern for Switzerland with its two outsized banking
giants.

Asked by Market News International if this is an example of
regulators unnecessarily seeking to impose tougher regulations than is
required, Dallara noted that for now, these are just recommendations,
although it may well become final policy.

He acknowledged that Switzerland is in a special situation, with
two large banks whose assets cumulatively are roughly four times the
size of Swiss GDP. “So in some respects, one could argue that the case
for special requirements there is stronger than it is in other cases.”

However, in the global context, if each national regulatory agency
and central bank seeks to substantially amend the Basel rules, “Do we
have anything approaching a globally consistent framework?” Dallara
asked.

Much of the impact of the Swiss implementing stricter capital
requirements, will be felt outside its borders, Dallara said, because of
the global operations of both firms.

Phillip Suttle, the IIF’s chief economist, agreed, saying the
downsizing of major international banks is something “everyone feels the
pain on.”

Going down the road of fragmentation, Dallara warned, will result
in a world characterized by inefficient financial market structures,
regulatory arbitrage and the kind of uncertainty globally that will
prevent the running of a stable financial system.

** Market News International Washington Bureau: 202-371-2121 **

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