Geithner sees encouraging signs on economy, backs stimulus

By Glenn Somerville and Estelle Shirbon

PARIS (Reuters) - U.S. Treasury Secretary Timothy Geithner expressed confidence on Thursday that global financial markets were mending but would not comment on lender CIT Group Inc, which U.S. authorities seemed ready to let sink.

Near the end of a 4-day trip to Europe and the Middle East, Geithner met French Economy Minister Christine Lagarde who said the United States and France agreed on most measures to boost economic activity but not on new capital limits for banks.

"We agree on a large number of principles," Lagarde said, but added, "We have disagreements on what we call the lever effect and the limit of that lever effect as it applies to banks and financial institutions."

She suggested banks should be required to have higher capital levels.

Geithner made no mention of any areas of disagreement, instead citing signs that a two-year old crisis was easing and crediting that to coordinated worldwide efforts to add liquidity and introduce new and stiffer regulatory measures.

"You're seeing markets start to function better, your risk premia reduced," he said in a joint appearance with Lagarde on a rooftop terrace of the French economy ministry.

"That is fundamentally a good thing, a sign of success in our collective efforts to address the crisis."

In a follow-on appearance on Bloomberg Television, Geithner ducked questions about ailing CIT, lender to hundreds of thousands of small and mid-sized U.S. businesses. CIT said on Wednesday that bailout talks with the government had ended.

CIT's most likely course now is widely regarded to be a declaration of bankruptcy.

In an online chat with French business newspaper Les Echos, Geithner said it was important to ensure firms have access to capital but made no mention of CIT or any other company.

"You are right that in recessions the dominant risk is that banks and investors will take too little risk," he said.

"The only effective way to deal with this is to provide support for a restoration of private demand and to make sure more capital comes into the parts of the financial system that need it."

Geithner said it was essential that governments do everything they can to prime an economic recovery and stick with stimulus measures as long as necessary.

COMPENSATION LIMITS

Geithner said that he favoured reforms that would bring some limits on executive pay to make sure that compensation was in line with risk taking.