Call for more stress tests as G8 meets

Finance ministers of the G8 group of major Western economies are meeting in Italy under pressure to step up efforts to clean up their banking industries, even as cautious optimism for a global recovery leads some nations to press for a relaxation of economic stimulus efforts.

Canada’s finance minister Jim Flaherty joined US officials and the British chancellor, Alistair Darling, in calling on continental European nations to do more to restore confidence in their banks.

"Everyone should do stress testing of their national banking system, it's fundamental for trust,” Mr Flaherty said yesterday. “There is some resistance in Europe on stress tests, and a tendency to look to other countries to resolve the problems.”

His comments echoed those of Mr Darling, in a newspaper interview, suggesting that some European countries had been turning a blind eye to the problems in their banks and had failed to follow Britain’s lead in identifying “toxic assets” — particularly risky loans that are doomed to go bad — and then recapitalising the institutions.

“If there is a problem it doesn’t get any better by walking around it and hoping it will go away,” Mr Darling said.

From the outside, the Chinese government, which is financing giant budget deficits in the West through the purchase of government bonds, also added to the pressure. Liu Mingkang, chairman of the China Banking Regulatory Commission, made an eve-of-summit speech in English saying that while the measures taken so far to support the financial sector have helped ease panic in the markets, they are still “inadequate”.

“Toxic assets must be immediately resolved world-wide,” he said. “Absent a radical carving off of toxic assets in one go, the picture will never be good.” Western governments, including the US, “need a new cooking manual”, he said. “China has got very good Chinese cuisine. If you need that manual, I can offer it to you free.”

The debate over the banking systems is only one in which continental European nations, led by Germany, are likely to be pitched against Britain and the US in the G8. Germany is pressing for debate on how governments can start to unwind the massive economic stimulus measures that have been used in the past year to mitigate the worst effects of the recession. Germany is concerned about budget deficits and potential future inflation; the US Treasury secretary Tim Geithner this week said he would be pressing the G8 to “stay the course on economic stimulus”.

“The dominant focus of policy still is to see we have a strong foundation for recovery in place with enough traction,” he said. “That is still the dominant preoccupation of policy everywhere.”