TOXIC ASSETS

World leaders at the G20 summit on Thursday are ducking the critical issue of cleaning up the toxic assets poisoning the banking system and risk prolonging the worst global recession in generations, the International Monetary Fund chief warned on Wednesday.

On the eve of a summit aiming to agree a “global plan for recovery and reform”, Dominique Strauss-Kahn told the Financial Times that the fund’s experience from 122 banking crises suggested “that you never recover before the cleaning up of the banking sector has been done”.

“The US…is rightly insisting on stimulus and the EU rightly insisting on regulation. They are not yet moving quickly enough in doing the cleaning up of the financial system,” he said. His warning came as leaders of the world’s most powerful economies struggled to bridge divisions over the priorities amid violent anti-capitalist demonstrations in London. Protesters besieged the Bank of England and smashed their way into a nearby bank branch, sparking clashes with riot police.

France and Germany threatened to block a deal on Thursday if their “red lines” on tougher financial regulation were not met, raising the prospect of a clash with China over tax havens.

Nicolas Sarkozy, French president, and Angela Merkel, German chancellor, laid down explicit conditions for a deal, including tougher regulation of hedge funds, tax havens and bankers’ pay.

At a joint press conference, Mr Sarkozy said: “The time for pointless summits is behind us.” Ms Merkel said it was no longer acceptable to “sweep things under the carpet”.

Although Gordon Brown, the UK prime minister, remains confident Thursday’s summit will end with smiles, the tough Franco-German stance left him trying to broker a deal last night.

Mr Sarkozy said he feared China was an obstacle to a clampdown on tax havens and that he suspected that “the interests of Hong Kong and Macao” lay behind it. Downing Street officials conceded tough discussions were continuing into the night. Mr Brown sat the French president next to Hu Jintao, the Chinese president, at Wednesday night’s official G20 banquet in an attempt to forge a compromise.

Future of capitalism

Video: New York panel discusses the causes of the current financial crisis

Speaking earlier, Barack Obama, the US president, confirmed that while continental Europeans wanted the summit to focus on regulation his emphasis was on the “enormous consensus” on plans to restore growth to the world economy. He added that the core of the summit would be “that government has to take some steps to deal with a contracting global market place and that we should be promoting growth”.He insisted that divisions between the US and Europe over the a new fiscal stimulus were “massively overstated” but warned that the ”voracious” American consumer could no longer be expected to pull the world out of recession. “If there is going to be renewed growth, it can’t just be the United States as the engine,” he said.

Mr Strauss-Kahn’s warnings were echoed by Mario Draghi, the head of the Financial Stability Forum, the new body of regulators, finance ministers and central bankers. “The main thing we need now is to implement a sense of transparency where we can put a credible floor to the bank losses”.