DealBook: 22 Under Investigation in Libor Case in Britain

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Britain Must Do More for Economy, I.M.F. Warns

LONDON — Britain should do more to fuel economic growth and be prepared to pump more money into its bailed-out banks if necessary, the International Monetary Fund said Wednesday in a report.

The I.M.F. said that some recent economic data from Britain were “encouraging,” but that the data did not point toward a sustainable recovery in the near term. “Activity appears to be improving, but a slow recovery remains likely,” the fund said.

That view stands in contrast to comments by the outgoing governor of the Bank of England, Mervyn A. King, who said last week that there was “a welcome change in the economic outlook” and that a recovery was “in sight.”

The fund has been a critic of the austerity program designed by George Osborne, the chancellor of the Exchequer, saying that the British economy would recover more quickly if the government slowed its spending cuts and tax increases. The I.M.F. reiterated that warning on Wednesday and called for additional public spending. Especially helpful to the economic recovery, the fund said, would be spending on transportation and energy infrastructure and on training for low-skilled workers.

“The U.K. is, however, still a long way from a strong and sustainable recovery,” the I.M.F. said, adding that the low level of capital investment and high youth unemployment remained a concern. “The prospect remains for weak growth,” the report said.

Mr. Osborne has rejected criticism of his austerity plan, saying that the spending cuts were essential to reduce the budget deficit, which in turn would keep Britain’s borrowing costs low and allow for economic growth to return.

A recovery might take even longer if demand from export markets like the euro zone does not pick up, banks continue to be reluctant to lend and the government’s austerity program turns out to be a bigger drag on the economy than anticipated.

Ed Balls, a spokesman on economic issues for the opposition Labour Party, said the report was “the call for action on jobs and growth that the I.M.F. has been threatening to deliver for many months and a stark warning of the consequences if the chancellor refuses to listen.”

In remarks before the I.M.F. released its report, Mr. Osborne said he broadly agreed with its contents but added, “There are no easy answers to problems built up in the U.K. over many years.” He added that it was “a hard road to recovery. But we’re making progress.”

The I.M.F. also said that the government should not shy from bolstering the capital of two bailed-out banks, Royal Bank of Scotland and Lloyds Banking Group, to ease the process of returning them to private ownership. The government took stakes in both banks during the financial crisis and owns 81 percent of R.B.S. and 39 percent of Lloyds.

In separate statements, R.B.S. and Lloyds said Wednesday that they would increase their capital reserves by retaining earnings and selling assets. Regulators said recently that all of Britain’s largest banks must raise a combined 25 billion pounds, or $38 billion, to make them more stable.

Britain Takes On Brussels in Fight Over Bank Pay

BRUSSELS — The British finance minister, George Osborne, is expected Tuesday to urge his European Union counterparts to water down proposed rules restricting the size of bankers’ bonuses.

The proposal is a sore point for Britain, which is home to Europe’s main financial hub, and where many in government and the financial industry worry that mandated limit to bonuses could make it harder for London to compete in international banking circles.

A failure by Mr. Osborne to win concessions during a monthly meeting here on Tuesday of the European Union’s 27 finance ministers could fuel disenchantment with the Union among restive members of Britain’s ruling Conservative party. Prime Minister David Cameron has already called for a referendum on Britain’s membership in the Union.

Yet if Mr. Osborne pushes too hard against the bonus cap, his government risks criticism at home for succoring bankers. They are unpopular with large swaths of the British electorate for earning lavish salaries even as a prolonged economic downturn forces many households to scrimp. Many voters also resent the banking industry for receiving a series of giant bailouts paid for by taxpayers.

The meeting Tuesday will follow a Monday evening session by 17 of the same finance ministers, representatives of the euro currency union, who discussed but deferred action on a bailout request by Cyprus. That country is seeking about €17 billion, $22 billion, to shore up government finances and its banks, which were badly exposed to a debt write-down in Greece.

But for Britain, which is not a member of the euro zone, the banker bonus proposal is the main issue. The Cameron government considers the bonus cap “misguided and fear it could impact negatively on London without even combating the excessive risk-taking it was meant to address,” said Simon Tilford, chief economist at the Center for European Reform, a research organization based in London.

“But London is caught between a rock and a hard place, as there’s much popular antipathy toward the bankers,” Mr. Tilford said. The issue of banker remuneration “is pretty toxic stuff Britain,” he added.

Further undermining Britain’s position ahead of the meeting is the result of a referendum over the weekend in Switzerland, also known for its business-friendly climate but where voters approved tighter restrictions on executive compensation. That vote will give shareholders of companies listed in Switzerland a binding say on the overall pay packages for executives and directors.

The bonus cap legislation that concerns the British leadership cleared an important hurdle last week when representatives of E.U. governments and the European Parliament agreed that the coveted bonuses many bankers receive would be capped at no more than their annual salaries, starting next year. Only if a bank’s shareholders approved could a bonus be higher — and even then it would be limited to no more than double the salary.

The rules are drafted so that a banker working in New York for a British bank like Barclays would be subject to the rules, as would a banker in London working for a U.S. bank like Citigroup.

Another reason Mr. Osborne may be hesitant to oppose the bonus rules too vociferously is that they are part of a legislative package that includes something his government favors: tougher rules about how much capital European banks most hold in reserve to protect against losses.

Britain and Mr. Osborne have strongly backed the higher capital requirements as essential for preventing another financial crisis.

In any event, European Union diplomats said ministers were unlikely to formally approve the rules on Tuesday because details still needed to be nailed down. That could still give Britain weeks, or even months, to press for concessions.

There are also questions among some European countries about how strictly to apply parts of the legislation requiring banks to publish detailed information on profits, taxes and subsidies on a country-by-country basis across the globe.

In the case of the separate Cyprus bailout discussions Monday evening, euro zone finance ministers were taking up talks that stalled with the country’s previous, Communist-led government. That government was replaced late last month by a center-right administration, a change that has been welcomed in other European capitals.

News Analysis: Britain Rethinks Opposition to a Two-Tier E.U.

BRITAIN could be on the verge of accepting, maybe even welcoming, the two-tier European Union it has long resisted.

When Prime Minister David Cameron warned on Sunday that he might veto the bloc’s next budget, he was repeating a threat made by most of his predecessors before they haggled over future spending. But in a BBC interview, Mr. Cameron went on to suggest something never countenanced by any previous British prime minister: that on spending issues, it might be good to split the European Union in two.

Despite its long ambivalence toward European integration and its refusal to adopt the euro, Britain has usually demanded a seat at Europe’s top table. And the country has resisted moves to relegate it to an outer, more detached tier as a status not befitting a global power.

But with Britain struggling to emerge from recession and Mr. Cameron under domestic political pressure to distance his country from Europe’s financial problems, he is now willing to let Britain take a back seat in the European Union.

“When you have got a single currency with a central bank behind it and more transfers between those countries, there will come a time, I believe, when you will need to have two European budgets: one for the single currency — because they are going to have to support each other much more — and perhaps a wider budget for everybody else,” Mr. Cameron told the BBC interviewer, Andrew Marr.

“We should be welcoming of this,” Mr. Cameron added.

Under plans now being discussed in Brussels, the 17 European Union nations that use the euro could have their own budget, allowing them to make big transfers of cash to help ease the type of economic pain now being felt in Greece and Spain. They might even have their own separate parliament, to make the system more accountable.

By contrast, countries like Britain would stay out, driving in Europe’s slow lane — or perhaps heading in another direction altogether.

For longtime observers of Britain’s engagement in the European Union, this is a shift of potentially historic proportions.

“Ever since it joined, British policy has been based on the imperative of being in the room when important matters are discussed,” said Charles Grant, director of the Center for European Reform in London, “so that Britain could either stop things happening or shape outcomes that suit Britain.”

“However, over the past year, it has become apparent that a new principle has emerged: to encourage the others to integrate, while we stand back, leave the room and adopt a semidetached relationship with our partners,” he said.

The 27-country European Union provides a single market for its member-nations’ goods and allows the unfettered transit of citizens across national borders, among other shared benefits. Those functions presumably would stay in place. But if it were to adopt a two-tier budget, it remains unclear on what the money would be spent or how the new structure would operate.

Nor is it clear how such a plan would play out in British politics. Although the opposition Labour Party has criticized Mr. Cameron in the past for what it considers his marginalizing of Britain’s role in Europe, Labour has not tipped its hand on whether it thinks there should be a referendum vote on Britain’s relationship with the bloc. Mr. Cameron could encounter more resistance from the Liberal Democrats within his own coalition government, who are more pro-European than Mr. Cameron’s Conservatives.

Talks on the next European Union budget are expected to culminate in November when European leaders will try to agree on a spending ceiling for the 2014-2020 period.

The European Commission, the bloc’s executive branch, has proposed a figure of up to 1.03 trillion euros, or $1.34 trillion, for all 27 nations. That compares with a ceiling of 975 billion euros for the current seven-year period. The proposed figure, though, is almost certain to be negotiated downward. With the Continent engaged in country-by-country cuts in national budgets, Britain has led calls for curbs.