Muffins with the flags of G20 countries displayed in the media center before the G20 Finance Ministers meeting Saturday at a hotel near Horsham in southern England

Group of 20 finance ministers zeroed in on cleansing banks of toxic assets as they sought to set aside a transatlantic dispute on how best to fight the global recession.

“You are not going to have a substantial recovery in the real economies until we solve this bank issue,” Flaherty told reporters in Horsham. Lagarde, who this week stoked concerns of a rift with the US, said in an interview that “it would be major” if the G-20 agreed how to aid banks.

A deepening slump and the banking turmoil are forcing officials to form a more united approach. The run-up to the meeting was marred by discord as European governments rebuffed a US call to spend more money and demanded more focus be paid to tightening market regulation.

“We need urgent policy action,” Simon Johnson, a former chief economist at the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics, told Bloomberg Television. “The financial sector problems are far from over. We have a worsening real economy.”

The G-20 officials met at the end of a week in which the IMF said the global economy would contract for the first year since World War II. Data in recent days showed US consumer confidence near a 28-year low, Chinese exports plunging by a record-setting margin and German factory orders sinking 38 percent.

IMF Managing Director Dominique Strauss-Kahn has warned that failure to step up efforts to rid banks of damaged securities may delay the economic recovery beyond 2010. “If you don’t take on the banking issue, stimulus is just like a sugar high,” World Bank President Robert Zoellick said Friday in London.

Indicating that banks remain reluctant to lend 19 months after the crisis began, the London interbank offered rate, or Libor, which the lenders say they charge each other for three-month funds, rebounded this week to its highest point since January 8. Financial companies are still hoarding cash after being stung by almost $1.2 trillion of write-downs and losses.

Stimuli vs. regulation

The US has yet to implement its plan to remove tainted assets from banks, while the UK has guaranteed £585 billion (US$820 billion) in toxicity held by Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

German Chancellor Angela Merkel’s government is considering a plan to take over non-performing bank assets until they mature, enabling lenders to avoid massive write-offs while dodging a new bailout, according to three people familiar with the proposal.

Having told LCI Television Friday morning that G-20 members “don’t exactly have the same priorities,” Lagarde later said she was “very optimistic” that a compromise could be found between the US’s urging of greater stimulus and Europe’s request to toughen market rules. “Everyone is working with that spirit,” she said in an interview in Horsham.

“There’s a lot of common ground between us, although, obviously with 20 people around the table, there are bound to be differences,” UK Chancellor of the Exchequer Alistair Darling said. “I would expect for people to sit down and resolve those differences.”

For their part, US officials said they weren’t obsessed with easing fiscal policy alone and that they were also keen to overhaul governance of markets to prevent future crises. Treasury Secretary Timothy Geithner “will reiterate the dual priorities of forging consensus on the need for sustained action toward recovery and growth, while coordinating and reforming the international regulatory and supervisory system,” his office said.

Geithner approached the G-20 talks by lobbying his counterparts to follow the US in injecting fiscal stimuli equivalent to at least 2 percent of their economy’s gross domestic product this year. European officials argued they had already spent enough, ran bigger social safety nets and didn’t want to blow out budgets.

The US push for governments to do more was heeded by Japan, where Prime Minister Taro Aso ordered a third spending plan.

G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the US, the UK and the European Union.

Source: Bloomberg