Bank worries, shaky recovery cloud G8 finance talks


July 15, 2010 Updated Jun 14, 2009 at 9:41 PM CDT

Conflicting signs about prospects for a global economic recovery and worries about the health of Europe's banks clouded a meeting of finance ministers from the G8 top world powers on Friday.

"There are relatively small but encouraging signs of a return to stability," Canadian Finance Minister James Flaherty told reporters ahead of the talks in Lecce in southern Italy.

"I think what we need to work on is an exit strategy. There's been massive government involvement but now we need to plan, as growth returns, to withdraw from the private sector," he said.

"I don't think any of us want to have government-run economies," he added.

New data meanwhile showed industrial output and retail sales increasing at a faster clip in China but in the 16-nation eurozone industrial output fell by 21.6 percent in April over 12 months -- the highest contraction on record.

And while the International Monetary Fund upped its forecast for global growth in 2010 to 2.4 percent, the World Bank said the recession in 2009 would be worse than expected and the WTO said there were no signs of a recovery yet.

"I do not share the optimism" of some governments, World Trade Organisation chief Pascal Lamy said at a debate in Paris.

"There is nothing to say that we are not still deep in this crisis which has begun and will continue," he added.

Speaking ahead of the two-day talks in Lecce, British finance minister Alistair Darling warned that Britain's recovery could be held back in part by other European countries failing to clean up their banks.

The IMF has called for "stress tests" to gauge the capital requirements of European banks similar to ones implemented by Britain and the United States but Germany has said these could undermine fledgling economic confidence.

"If there is a problem it doesn?t get any better by walking around it and hoping it will go away," Darling told the Financial Times in an interview.

"In relation to cleaning up the banks -- that's essential and every single country, if there's a problem, you need to sort it," he told the paper.

"Because if you don't sort that problem you'll never sort out the economy."

Another hot issue at the talks will be setting new rules on global finance to avert another crisis. Britain has opposed plans for stricter monitoring of financial markets put forward by the European Commission.

US President Barack Obama is to outline US plans for financial regulation next week and the topic will be on the agenda at the G8 summit in July.

US Treasury Secretary Timothy Geithner meanwhile said he would urge fellow finance chiefs at the G8 meeting to stay the course on economic stimulus spending and financial reforms despite signs the global recession is easing.

"I think it is fair to say the force of the global storm is receding a bit," Geithner told reporters this week ahead of the talks.

"I think fundamentally those signs of improvement ... are the result of policy actions we have put in place here in the US and around the world."

"Of course we want to see those actions sustained," he added.

Despite hopes for a recovery, financial markets have been getting increasingly jittery about how governments plan to scale back massive debts and spending once economic growth gets underway -- so-called "exit strategies."

There could also be more fallout at the G8 meeting from scathing criticism issued by German Chancellor Angela Merkel this month against Britain and the United States for their massive cash injections to boost the economy.

The Lecce talks officially started with a dinner on Friday with ministers from all the Group of Eight (G8) countries -- Britain, Canada, France, Germany, Italy, Japan, Russia and the United States -- in attendance.

The talks are to finish at 1300 GMT on Saturday with a joint declaration.

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