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Geithner sees encouraging signs on economy, backs stimulus

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.

French Prime Minister Francois Fillon (R) poses for the media next to U.S. Treasury Secretary Timothy Geithner during a meeting in Paris July 16, 2009. Fillon told Geithner that France aimed to bring its public finances back to balance in the long run during a meeting in Paris on Thursday. REUTERS/Bertrand Guay/Pool

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.

“It is very important that we not just bring the global economy out of recession ... but also that we bring about comprehensive reform of compensation practices,” he said.

Lagarde said that Paris and Washington were cooperating closely leading up to a meeting of the increasingly important Group of 20 developed and key emerging countries that will carry on discussion about needed reforms in September.

“We’re working toward the Pittsburgh meeting and we’re working hand in hand, exactly along the lines that we have identified,” Lagarde said.

As he did earlier on his swing through Saudi Arabia and the United Arab Emirates, Geithner again said the U.S. dollar was likely to remain the global economy’s key reserve currency.

A number of other countries, including France, have suggested it might be time to consider having a broader basket of global reserve currencies, an idea that has gained strength as huge U.S. borrowing fosters fears about future inflation.

“The dollar’s role in the international financial system places special responsibilities on the United States, to sustain confidence in our financial system, to bring our fiscal deficits down when recovery is in place, and to preserve the Fed’s strong record of price stability,” he said.

Geithner also met Prime Minister Francois Fillon with whom he discussed the issue of sanctions on Iran.

Additional reporting by Patrick Graham in London, Anna Willard and Sophie Hardach in Paris; Editing by Ruth Pitchford

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