By Christine Harper
Feb. 2 (Bloomberg) -- As world leaders in Davos called last week for international cooperation to tackle the financial and economic crisis, businessmen were complaining that the stress is only aggravating national divides.
The financial industry’s effort to reduce risks from credit- default swaps is being held up because of regional competition, NYSE Euronext Chief Executive Officer Duncan Niederauer said. A mechanism set up by the London Clearing House has met resistance from banks and authorities in continental Europe, he said.
“The solution we’ve established for a very legitimate clearing house is somehow not acceptable to the continent because it’s not in the eurozone,” Niederauer told a lunch gathering hosted by Credit Suisse Group AG on Jan. 30. “It all seems like nonsense to me. We should think about trying to solve the problem, not playing politics here.”
British Prime Minister Gordon Brown and German Chancellor Angela Merkel were among leaders at the World Economic Forum in Davos, Switzerland, who said countries should work together on common economic policies and regulatory standards. Many, including French Finance Minister Christine Lagarde, talked about the need to find common proposals ahead of the Group of 20 meetings scheduled to take place in April in London.
Merkel said the financial industry needs “clear-cut rules worldwide” and “a charter for the global economic order” that could lead to the creation of a United Nations economic council. She criticized “unfettered capitalism” and called for vigilance against protectionism, noting that she’s “very wary” of government aid for U.S. automakers.
‘Bigger Problem’
Brown warned that a “bigger problem” than trade protectionism is the threat of financial protectionism, in which banks repatriate capital from abroad, especially from emerging markets, to satisfy government terms for emergency assistance. The Institute of International Finance predicted capital flows to emerging markets would slow to $165 billion in 2009 from a record $929 billion two years ago.
“What you’re seeing is a form of financial protectionism where banks retreat to their home base,” Brown said in Davos. “The tendency at the moment will be to either retreat into protectionism or retreat into doing nothing.”
Lagarde said at a Jan. 31 press conference in Davos that bank bailouts and fiscal stimulus plans are “implicit protectionism.”
Brown’s government led a bailout of British banks, including Edinburgh-based Royal Bank of Scotland Group Plc, which he accused of taking “irresponsible risks.” In return for taxpayer funds, banks have been required to maintain lending at 2007 levels to offset a withdrawal of loans from foreign banks.
Rise in Protectionism
Gary Cohn, co-president of New York-based Goldman Sachs Group Inc., said he’s concerned about an increase in protectionism in industries like banking and automobile manufacturing that have been supported by taxpayer money.
“Are the U.K. financial institutions going to lend money to other corporations in other countries and withstand the loss?” Cohn said. “I don’t know what the answers are, but it’s definitely an interesting question.”
Rupert Murdoch, chairman of News Corp., said at a panel discussion in Davos that he too was concerned about protectionism.
“A leading French industrialist told me how the government there, the President there, says ‘I understand you have to make savings in France, but don’t fire anyone in France,’” Murdoch said. “There’s been a very dangerous move towards protectionism in many places.”
‘National Treasures’
Niederauer also said a recent effort by New York-based NYSE Euronext to eliminate jobs in Europe to lower costs ran into resistance by regulators.
“There’s only so much that I can globalize, and that has been really apparent to me in the recent crisis,” Niederauer said. “It turns out that regulators think exchanges are national assets, if not national treasures, and they’re strategic and they’re to be protected.”
Reaching common standards for bank capital requirements and similar regulatory issues will be possible even if there are signs of financial protectionism, said Adair Turner, chairman of the U.K.’s Financial Services Authority.
“There are going to be major breakthroughs on things like how do we deal with general provisions in banks,” Turner said in an interview in Davos. “It doesn’t help us out of what we’re in now, but makes it more robust so we don’t do it again in 10 years’ time.”
Indian Farmers
Peter Sutherland, chairman of London-based BP Plc, issued an exasperated plea in Davos for politicians to set aside their domestic interests and reach a new world trade agreement.
“The world badly needs a confidence boost,” Sutherland said. “It also needs an antidote to the protectionism, which is already evident in responses to the global slowdown. It’s undermining confidence that the global economic community can’t get its act together.”
Sutherland said the U.S. and India were responsible for holding up efforts on a new trade agreement. Yet in the same room the previous day, an Indian businessman said his country’s economy was benefiting from its protected status.
“The real strength that India has is that one major sector of its economy is truly decoupled from the rest of the world, and that’s Indian agriculture,” said Anand Mahindra, vice chairman of Mahindra & Mahindra Ltd., India’s largest maker of sport- utility vehicles and tractors.
“We never moved quickly enough on banking reforms, we were criticized for that, but that’s precisely why our banking sector is well insulated today and has some of the highest capital adequacy ratios,” Mahindra said. “We were always behind in the export game, which is why it’s only 20 percent of GDP. That means we are not suffering any severe whiplash from markets melting down.”
To contact the reporter on this story: Christine Harper in New York on charper@bloomberg.net.
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