Lagarde warns of reform slowdown


International Monetary Fund Managing Director Christine Lagarde holds a news conference Thursday in Washington to discuss the IMF's views on economic policy priorities in the year ahead. (GARY CAMERON/REUTERS)

International Monetary Fund managing director Christine Lagarde on Thursday urged faster work to strengthen the financial system against the sort of crises that threw the world into recession in 2008 and continue to weigh on Europe.

After a flurry of new laws and regulations approved in the wake of the Lehman Bros. collapse in 2008, Lagarde said she feared momentum was “waning” even though some major issues remain unresolved.

Europe is still debating the scope of a proposed banking union, while regulators throughout the world have made only episodic progress on rules that would better spread the costs of major bank failures across nations.

“There has been progress, but the process has been very time consuming and we sense a waning commitment,” Lagarde said in a media briefing in Washington on Thursday.

She said she worried that some new rules meant to strengthen the financial system were being “softened at the margins” as banks argue that if regulations become too strict it will discourage lending and undercut an already weak recovery.

Her comments come with the global economy in a sort of limbo. The worst downturn in a century has past, but developed nations are struggling with the hangover of government debts and stubbornly high unemployment, Europe seems stuck in an era of little or no growth, and developing countries are not yet able to drive world growth on their own.

For every bright spot — the U.S. economy continues to expand and the worst of Europe’s sovereign debt problems have subsided — there is an offsetting risk that continues to hold back a stronger recovery — an impending battle over the U.S. debt ceiling that could hobble the world’s largest economy, an ongoing recession in Europe.

“We stopped the collapse,” Lagarde said, but the challenge now is to “avoid the relapse.”

The coming year could mark a turning point — for better or worse.

In coming weeks, European banks can begin repaying long-term loans from the European Central Bank. The loans, crucial in avoiding a full scale banking crisis, were provided a year ago, and the ability of banks to start repaying them early is being watched as a sign of the financial system’s health. In December, Ireland’s bailout comes to an end, testing whether one of the euro’s troubled countries can fully return to international bond markets.

The U.S. must navigate its debt ceiling and an upcoming budget debate. Countries like Brazil and China will be tested to see if they can sustain their own internal growth without a strong recovery in the rest of the world.

The World Bank this week sharply lowered its forecast for global growth in 2013. While Lagarde did not provide any updated forecasts, she said was worried that the seeming calm in global markets would make officials sanguine.

“We should make sure that none of the decision makers and none of the authorities relax, assuming that because there is a bit of recovery in sight...it is time to slow the pace and go back to business as usual,” she said.

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