OECD's Gurria:IMF,ECB,EZ Firewall 'Rather Formidable Package'

--Have A More Vulnerable Banking System If Banks Don't Raise

Capital --IMFC Communique 'A Mixed Verdict' By Brai Odion-Esene

WASHINGTON (MNI) - Following the agreement to boost the

International Monetary Fund's resources by over $400 billion,

combined with measures already put in place by the European

Central Bank and European authorities, means a "formidable"

package is now available to combat the sovereign debt crisis, the

head of the OECD said Saturday. Speaking to reporters after the

meeting of the IMF's International Monetary and Financial

Committee in Washington, OECD Secretary General Angel Gurria

warned, however, that the issue of bank capitalization must still

be addressed or the system will remain vulnerable. The United

States chose not to add its voice to countries pledging

additional funds to the IMF, but Gurria said while the fund's

biggest voting member might not have be able to join in "for

practical reasons, they always have been there, so in a way its

like reserves -- its still there and its still available." The

IMF was able to secure an increase in its resources by over $430

billion, almost doubling its lending capacity. Gurria said when

taken together, the additional $430 billion for the IMF, the

boost of the Eurozone firewall to E700 billion, and funding

provided to banks via the European Central Bank's three-year long

term refinancing operation "are a rather formidable package.""You

are talking upwards of almost $2.3 trillion to $2.5 trillion," he

said. "That's a lot of money in any language." Having tackled the

issues of Greece, banks' funding, setting up firewalls, and the

Eurozone's fiscal compact, "we still have to deal with the

capitalization of the banks," Gurria said, something that has

occurred at a faster pace in the United States compared to

Europe. Secondly, European authorities must address how to

achieve a balance between fiscal consolidation and growth, he

said. The third is a combination of issues; from very high

unemployment, particularly among the youth, to growing inequality

and the "very clear threat" of increased protectionism. "Those

things have to be addressed," Gurria said. However, with interest

rates in most advanced economist at or close to zero, "we have

practically run out of monetary policy room," he said, while with

regard to fiscal policy -- "we've exhausted to a very great

extent whatever room we had ... to get out of the recession." In

its communique at the end of its meeting, the IMFC said the world

economy is "recovering gradually," but projected only "moderate"

growth and warned that "risks remain high." The group called for

continued "accommodative" monetary policies in advanced economies

and warned against "excessively contractionary fiscal policies."

Gurria called the communique "a mixed verdict," with "green

shoots" noted in the U.S., relatively flat growth in Europe, some

recovery in Japan, and a slowdown in the large emerging market

economies. "There's clearly progress, but on the structural

issues there is still a lot of work to do to secure medium and

long-term sustainability," Gurria said. In his written statement

to the IMFC, Gurria had said the global banking and financial

system remains "a major concern," noting that while progress is

being made to deal with Eurozone sovereign and banking crises,

"tensions remain in financial markets.""A more fundamental

process of reform of the global banking system remains

imperative," Gurria told the IMFC, especially as it pertains to

improving the equity capital positions of banks. Asked by MNI

about worries that banks raising their capital levels will mean

less available for lending, Gurria acknowledged that banks are

being asked to raise more capital "at a time when we are in a

very low-growth scenario, and in some cases in Europe a negative

growth scenario." Despite this, banks have to increase their

capital levels otherwise "there's a question of stability of the

system, but also of confidence," he warned. The concern is that

this will lead to deleveraging, but Gurria said banks have no

incentive to reduce their balance sheet unless forced to do so by

the regulatory environment or because they are unable to raise

capital via the markets. "So I think the incentive is there to

raise capital, but it's a complex moment to raise capital," he

said. "If they don't raise capital then you have a more

vulnerable banking system," he added. There is only a problem if

there is an attempt to do it all at once -- raising bank capital

levels while implementing prudential lending standards -- he

said. "There are such things as sequencing." ** MNI Washington

Bureau: 202-371-2121 **