G20 urged to stop demonising bankers

G20 leaders should stop demonising the finance sector and imposing onerous regulations on banks if they want lending and the world economy to recover, a global association of financial institutions said on Wednesday.

The Institute of International Finance, which has been negotiating with Greece on behalf of private investors in its sovereign debt, also defended the offer it made last week for a 50 per cent reduction in the face value of Greek bonds.

Charles Dallara, managing director of the Washington-based institute, said he was confident the proposal – a deeper cut than its first offer in July – would put Greece on a sustainable path towards growth and stabilising its debt, though he could not give an absolute guarantee.

“With the massive debt reduction and restructuring . . . I see Greece moving back into spontaneous capital market access within a few years,” he said.

Asked by reporters if he could reassure bondholders that there would be no deeper restructuring than the current offer, Mr Dallara said: “It is a very strong word. I wish I could reassure [about] a lot of things in life I can’t reassure.”

The revised offer, exact details of which remain to be worked out, has already been criticised by some economists and market participants as insufficient.

On Wednesday, the German banking association said that any debt swap would have to wait until after the Greek referendum on the international bail-out, though Mr Dallara declined to be drawn on how the referendum might affect timing.

The IIF, which says it represents more than 80 per cent of Greece’s international bondholders, made an initial offer in July to restructure Greek sovereign bonds that it said was a writedown of 21 per cent of the net present value of the debt, though independent estimates put it at much less.

On Wednesday, Mr Dallara attempted to quash suggestions that other countries such as Portugal would also be in line for a debt reduction.

“We view Greece as a unique situation in the eurozone”, he said. “We would not be willing to be involved in discussions of debt reduction for other countries.”

Portugal was on a path to growth and debt sustainability, he said.

In a letter to the Group of 20 leading economies in advance of their summit in Cannes beginning on Thursday, the IIF said that demands for banks to raise fresh capital threatened to choke off the supply of credit to businesses and provoke more sell-offs in sovereign debt.

“It is essential for the official sector to begin viewing the banking system as an indispensable partner in fostering recovery, rather than an adversary on which it is necessary to impose ever more punitive measures,” the letter said.

Mr Dallara said that with the currently prohibitive cost of raising private capital for banks, many would prefer to reduce lending if regulators imposed tough requirements.

“It is inevitable that many European banks will shrink risk assets rather than try to raise expensive capital or be subject to forced capital injections,” he said. “The market value of the debt of the countries most under scrutiny is likely to decline further as banks unload sovereign bonds.”

Public scrutiny of banks and financial sector regulation has risen as the protest occupations of Wall Street and other financial centres have spread, with an increasing number of policymakers saying they share the protesters’ aims.

“G20 leaders need to look beyond narrow regulatory imperatives to the broader economic and financial context,” said the institute.

It also called for big emerging-market countries to play a much larger role in global economic governance.