U.S. Treasury Secretary Timothy Geithner urged Europeans on Wednesday to work with Washington on a consistent approach to financial reform as the European Commission unveiled plans for a crisis levy on banks.
European shares rebounded by more than 2 percent from nine-month lows but the euro remained under pressure amid continuing signs of banks' reluctance to lend to euro zone counterparts exposed to southern European sovereign debt.
Geithner's stress on coordination of new regulation appeared aimed chiefly at Germany, Europe's biggest economy, which stunned markets and angered EU partners by unilaterally banning some speculative financial trades last week.
He is due to meet German Finance Minister Wolfgang Schaeuble in Berlin on Thursday after talks with new British counterpart George Osborne and Bank of England Governor Mervyn King in London on Wednesday and dinner in Frankfurt with European Central Bank President Jean-Claude Trichet.
"I'm going to meet the new UK government to prepare for the next stage of global financial reform — on the heels of what we expect to be a quick passage of U.S. reforms — to emphasise the importance of a carefully designed global approach, and to discuss developments in Europe," Geithner told reporters.
Business television channel CNBC said he would also urge the Europeans to stress test their banks to identify those that need new capital and restore market confidence in the banking system.
The European Union's executive arm outlined a framework for a levy on banks' assets, liabilities or profits to pay in advance for the cost of future crises, setting the stage for a showdown on the tax at a meeting of G20 world leaders in June.
"I believe in the 'polluter pays' principle," EU Internal Market Commissioner Michel Barnier said. "We need to build a system which ensures that the financial sector will pay the cost of banking crises in the future."
The Commission said the proceeds of a bank levy should be ring-fenced for national bank resolution funds, putting Brussels at odds with France and Britain, which want the money to help strapped national budgets.
European bank shares slumped on Tuesday amid concerns that a sovereign debt crisis that began with Greece may turn into a wider banking crisis.
The costs for banks to borrow dollars from each other crept up to a new 10-month high on Wednesday.
Fears that Europe's debt crisis could engulf some banks have made them reluctant to lend to each other as happened during the 2007-2009 financial crisis.
Money markets are "pricing in for a credit crunch", said Michael Pond, Treasury strategist at Barclays Capital in New York. "A crisis of confidence is developing once again."
Investors are not confident that measures so far, including Germany's ban on naked short-selling of some securities, austerity plans by indebted euro zone members or even a 750 billion euro ($926 billion) rescue fund will be enough to prevent Europe's woes from derailing the global recovery.
OECD UPBEAT
The Paris-based Organisation for Economic Co-operation and Development said the global economy was recovering faster than expected from recession with Asia leading the way but remained at risk from huge debts in developed countries.
The OECD survey was even relatively upbeat about the euro zone, forecasting growth of 1.2 percent this year and 1.8 percent in 2011 — a more optimistic forecast than the European Commission's 0.9 and 1.5 percent respectively.
The OECD also said banks remained vulnerable, noting the high price of credit default swaps to protect bond investments.
European regulators conducted a confidential assessment of the solvency of national banking systems last September, but their reassuring conclusion failed to dispel doubts because they did not test individual banks or publish detailed findings.
Any European stress tests would have to differ from those conducted by U.S. regulators early last year, because Europe lacks a huge bailout fund like the $700 billion Troubled Asset Relief Program to plug any capital deficiencies found.
GERMAN BAN "COUNTER-PRODUCTIVE"
A senior U.S. Treasury official said Washington was unhappy with Berlin's "counter-productive" decision to go it alone in banning naked shorting of shares in top financial companies and sovereign euro bonds and related transactions in sovereign credit default swaps.
Geithner has also criticised European Union proposals to regulate hedge funds and private equity, warning that they could discriminate against non-European funds.
Far from yielding to widespread criticism, Berlin proposed on Tuesday extending restrictions on such speculative trades to include all shares, a government source said.
In the latest move in a German-inspired Europe-wide austerity drive meant to restore market confidence, Italy's cabinet approved a multibillion-euro package of budget cuts designed to slash the government's deficit to beneath the EU ceiling of 3.0 percent of GDP by 2012.
The 24 billion euro ($29.49 billion) plan includes a four-year freeze on public sector salaries, and a reduction in state personnel by replacing only one in five leavers.
EU Economic and Monetary Affairs Commissioner Olli Rehn said Italy's budget cuts were "very significant" and would help restore confidence in the euro zone. Credit ratings agencies Standard and Poor's and Moody's both said the package put Italy's finances on a sounder footing and should assure markets.
The downside of moves by Greece, Spain, Portugal, Ireland, Italy and Britain to slash deficits could be slower growth.
"There is indeed a risk that, under market pressure, some countries overdo austerity," Olivier Blanchard, chief economist of the International Monetary Fund, said in a newspaper interview on Tuesday. "That would be a mistake."
