Policymakers express concern, urge banks to lend

By Laura MacInnis and Patricia Zengerle

GENEVA/WASHINGTON (Reuters) - World economic leaders called on commercial banks on Monday to step up lending to revive an economy pitched into recession by failure of the global financial system.

The World Bank, in a letter to Group of Eight nations due to meet this week, said interventions by central banks and governments appeared to have "broken the fall in the global economy," but 2009 remained a dangerous year.

"Recent gains could be reversed easily, and the pace of recovery in 2010 is far from certain," Bank President Robert Zoellick wrote to the G8 host, Italian Prime Minister Silvio Berlusconi.

The G8 leaders, meeting in Italy, are expected to touch on longer-term reforms of world finance. China has raised the idea of creating alternatives to the dollar as a global reserve currency. But Chinese officials said the suggestion, which hit the dollar last week, was a distant prospect.

Governments have poured trillions of dollars into banks to spur lending to firms and individuals to boost the economy. But leaders have criticized banks for sitting on the funds.

Data released on Monday showed overnight deposits with the European Central Bank had reached an all-time high -- evidence banks preferred to hoard cash rather than risk lending it. European .FTEU3 and U.S. shares fell, reflecting the same uncertainty about the global outlook that sent oil prices and energy shares lower.

The yen and U.S. dollar also gained broadly as investors shunned risk and bought currencies perceived to be safe.

A report on Monday showed the U.S. service sector was still shrinking in June, but at a decelerating pace, with activity at the highest since September 2008.

The data provided some reassurance but was not enough to overcome last week's much-worse-than-expected U.S. jobs report.

British Prime Minister Gordon Brown said at a Franco-British summit in Evian, France, he was worried for the industries that are clamoring for funds.

ECB Governing Council member Ewald Nowotny said he saw no need to bypass the banking system at the moment to ensure credit reaches firms and consumers. "A strategy of taking money from the ECB and then putting it back into the deposit facility can only be short-term," he said.

Last month the ECB poured nearly half a trillion euros into money markets to try to kick-start lending.

Bank of Japan Governor Masaaki Shirakawa was similarly indirect in comments on Monday; but his message to banks was clear. "Many firms still face a tight funding and lending attitude from banks, although there are signs that the trend has stopped deteriorating," Shirakawa said.

The comments reinforced views that the Bank of Japan will extend its emergency corporate financing support beyond its September deadline.

The World Bank's Zoellick said a trend toward trade protectionism would imperil any recovery.