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New IMF chief says urgent action needed to protect recovery

JACKSON HOLE, Wyo (Reuters) – The new head of the IMF on Saturday urged global policymakers to pursue urgent action, including forcing European banks to bulk up their capital, to prevent a descent into a renewed world recession.

“Developments this summer have indicated we are in a dangerous new phase,” International Monetary Fund Managing Director Christine Lagarde said on Saturday at an annual conference hosted by the Kansas City Federal Reserve Bank.

“The stakes are clear; we risk seeing the fragile recovery derailed. So we must act now,” she said.

Two years after the end of the worst of the financial crisis, growth in the United States and Europe is sputtering as debt burdens rise. Volatility in financial markets has intensified strains on banks, further undercutting the meager global recovery.

Policymaker indecision on both sides of the Atlantic has shaken public confidence.

European leaders are fighting over who should pay the bill for taming a raging sovereign debt crisis.

In the United States, lawmakers and President Barack Obama fought a contentious budget battle earlier this summer that Federal Reserve Chairman Ben Bernanke warned here on Friday had shaken confidence and sapped U.S. growth prospects.

Lagarde said the Group of 20 leading economies should use a meeting in November to address the global economy’s woes in a convincing fashion.

Obama spoke with Germany Chancellor Angela Merkel on Saturday, and the White House said the two leaders vowed to act to shore up a global recovery that now looks at risk.

BERNANKE, OBAMA

Advanced economies must forge long-term plans to bring their debt under control, but at the same time should not pursue belt-tightening so fast that it imperils recovery, Lagarde said in her first major speech since taking over the top IMF job from Dominique Strauss-Kahn in July.

“Put simply, macroeconomic policies must support growth,” the former French economy minister said. On Friday, she reiterated the same point in a phone conversation with Obama, in which the White House said they agreed on the need for policies to spur job creation.

“Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation,” Lagarde said, adding that central banks should stand ready to jump back into unconventional policy actions if needed.

In his speech on Friday, Bernanke stopped short of promising the Fed would resume the bond buying that has been the centerpiece of U.S. monetary policy for the last few years, but he said the central bank would discuss options for further easing, and the need for it, at its next meeting in September.

European Central Bank President Jean-Claude Trichet, who appeared alongside Lagarde, emphasized the need to safeguard price stability as a foundation for healthy growth.

“It is something we consider absolutely essential for confidence,” he said.

EUROPEAN BANK STRESS

Opening a new front in dealing with financial strains at European banks, Lagarde called for a “mandatory substantial recapitalization,” through private channels if possible, but otherwise through some form of public, Europe-wide funding, such as the European Financial Stability Facility.

Shoring up banks is key to “cutting the chains of contagion” of the continent’s spreading debt crisis, she said.

Europe‘s banks have been under pressure to raise more capital after stress tests last month showed their potential vulnerability to losses on European sovereign debt, particularly Greek bonds.

Lagarde said individual European countries must also put in place deficit-cutting plans with a “credible finance path” — including continued support from the ECB.

In the United States, the focus on long-term fiscal consolidation must not ignore the importance of fostering near-term growth, she said.

“After all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?” she asked.

Policymakers must also stop the slide in the U.S. housing market, which is dragging on U.S. consumer spending and slowing the recovery, Lagarde added. The nation could turn to intervention by government housing finance agencies and more aggressive programs to reduce homeowner debt, she said.

(Editing by Padraic Cassidy)

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