By Gonzalo Vina
Oct. 15 (Bloomberg) -- Now that the U.S. is following Europe's lead by buying stakes in banks to shore them up, leaders of France, Germany and Britain are setting their sights on a bigger goal: tightening financial regulations worldwide.
The Americans aren't likely to go along quite so willingly this time, even if European leaders can manage to present a unified front, which also won't be easy.
European Union leaders meet today in Brussels to discuss the next steps in responding to the global market meltdown after committing more than $2 trillion to rescue their own institutions.
French President Nicolas Sarkozy, German Chancellor Angela Merkel and U.K. Prime Minister Gordon Brown are pushing for greater global regulation and an expanded role for the International Monetary Fund. Such a deal would echo the 1944 Bretton Woods agreement that fixed exchange rates and created the IMF and the World Bank.
``Europeans will have some strong points to make because markets have failed,'' said Martin Weale, director of the National Institute of Economic and Social Research in London. ``But the reality is that the U.S. got what it wanted in 1944 and, I suspect, will do so again simply because the Europeans won't be able to decide what they want.''
The EU leaders are trying to capitalize on the cachet Brown has enjoyed in recent days after Britain's rescue plan was partly copied by U.S. Treasury Secretary Hank Paulson.
European Rescue
Britain is spending 50 billion pounds ($87 billion) on bank stakes and extending another 450 billion pounds in loan guarantees. France, Germany, Spain the Netherlands and Austria together have pledged another 1.3 trillion euros ($1.8 trillion) to shore up loans and buy shares in their lenders.
The U.S. originally planned only to buy soured assets under its $700 bailout plan. Now, people familiar with the matter said, the Treasury plans to acquire stakes in Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., a combined Bank of America Corp./Merrill Lynch & Co. and several other big banks. Later, it will invest in ``thousands of others,'' President George W. Bush's working group on financial markets said.
``The U.S. followed Europe's lead because it wanted to see what the reaction would be and whether it would have the desired effect, and it did,'' said Robbert Van Batenburg, head of research at New York-based broker dealer Louis Capital Markets LP. ``But in this case, I just have a hard time believing the U.S. would relinquish oversight to the IMF. It will open up a whole can of worms. I don't think it's going to fly.''
Out of the `Woods'
Today's meeting of the 27 European leaders won't attempt a complete redo of Bretton Woods, named for the New Hampshire town where the deal was struck. Instead, they will discuss ways to limit contagion in the financial markets after the biggest stock sell-off since 1933.
``While the founders of Bretton Woods devised rules for a world of limited capital flows, we must devise new rules for a world of global capital flows,'' Brown said on Oct. 13.
Alarmed by the quickly spreading contagion -- triggered by Lehman Brothers Holdings Inc.'s failure last month -- European leaders want to replace the disparate banking rules in every nation with global regulations befitting the industry's worldwide footprint.
Brown long has advocated increased IMF economic surveillance and analysis of the global impact of individual nations' policies.
`Good Housekeeping'
``What we do not have is anything other than national and regional supervision'' of financial services companies, Brown said at a briefing in Brussels today. ``The rebuilding of the international financial architecture needs exactly the same vision that we had in the 1940s.''
Brown is pushing for a banking-industry culture change that would allow fewer bonuses and less reliance on high-risk trading. He also wants countries with quick-growing economies to have a bigger voice in the governance of the IMF.
``If you want to prevent crises like these you are going to have to come up with something more than rule changes, because banks will just get around them eventually,'' said Andrew Clare, a former Bank of England economist who now teaches finance at Cass Business School, at City University in London.
Americans used Bretton Woods as a lever to remake Europe's war-ravaged economy along market principles. The pact pegged the dollar to the value of gold -- a standard abandoned in 1971 -- and laid the groundwork for the IMF to become a lender of last- resort to troubled economies. With the West's financial system teetering, Bretton Woods has become a touchstone for today's policy makers.
`Discipline'
``Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline,'' European Central Bank President Jean-Claude Trichet said yesterday in New York, referring to what he called ``macroeconomic discipline, monetary discipline, market discipline.''
As emerging markets boomed in recent years, repaying IMF loans and piling up foreign-exchange reserves, the fund has struggled for a new role. The fund faced criticism from emerging-market policy makers who had chafed under IMF-mandated spending cuts, asset sales and interest-rate increases that were a condition of its loans.
Like Brown, Merkel said she wants a bigger oversight role for the IMF, along with ``stronger'' regulation of markets with new ``international rules.''
Tremonti's Plan
Italy, which takes over the presidency of the Group of Seven nations from Japan next year, will seek a ``new accord like Bretton Woods,'' Finance Minister Giulio Tremonti said on Oct. 13, without providing specifics.
Sarkozy agrees with Brown that emerging economies should have more say in global decision-making. His prescription: including China, India and Brazil in the Group of Eight industrialized nations.
``I will convince the Americans of the necessity'' of expanding the G-8 beyond the U.S., Russia, Britain, Germany, France, Italy, Canada and Japan, Sarkozy said Oct. 12.
``It's possible that the Europeans can now get it together on broader reform of the international financial system,'' said Richard Portes, professor of economics at London Business School. ``Discussions are going to have to be more inclusive than when the U.S. and U.K. called the shots. Brazil, India, China and others will now have to be included too.''
Not all will be easy sailing for the Europeans, who are struggling to forge a new regulatory framework in their own 27- nation bloc. Charles Goodhart, professor of finance at the London School of Economics and former Bank of England policy maker, said the U.S. likely will dismiss any proposal that would reduce its control of its own economic destiny.
``The Americans have been extremely unfortunate,'' Goodhart said. ``The British plan has been very good, but Gordon Brown's call for a new Bretton Woods is complete baloney.''
To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net
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