Governments warned not to slash spending

A POWERFUL global banking group has warned governments around the world not to cut spending too hard at a time when Europe's economic recovery remains fragile.

The Institute of International Finance, which counts ANZ chief executive Mike Smith as a director, also called for policymakers to slow their efforts in introducing banking regulation.

The IIF, which has more than 450 member institutions, was the body that led painstaking negotiations on behalf of private-sector creditors during Greece's debt restructuring last month.

While not directly citing Australia, its comments on ''austerity overload'' are likely to be seized on by business groups to argue that Canberra needs to reconsider its commitment to returning the budget to surplus next financial year.

''The emphasis so far on fiscal austerity, while to a degree necessary for the countries facing market funding difficulties, is excessive when carried out across the board,'' IIF chief Charles Dallara said in a letter to the International Monetary Fund and the World Bank.

The tighter spending by eurozone governments ''has already contributed to a steep contraction in domestic demand in the euro area as a whole'', Mr Dallara said.

For countries with fiscal headroom, including a surplus, it was important to move beyond budget discipline ''so as to avoid the risk of an austerity overload''.

In urging policymakers to slow the introduction of new banking regulation, the IIF said toughening capital standards beyond the requirements of the new global banking rules known as Basel 3 would restrict the sector's ability to provide businesses and households with the credit needed to lift economic growth.

In Australia, ANZ's Mr Smith has led calls for regulators to slow efforts to tighten bank rules, warning that the changes were likely to permanently increase the cost of banking for customers and reduce the flow of credit.

But local bank regulators have resisted such calls. Last month the Australian Prudential Regulation Authority said it would stick to the shape of the Basel 3 reforms as well as its accelerated timetable for the introduction of the new rules from the start of next year.