Davos summit leaves Cameron and Osborne feeling bruised

Tory leaders suffer barrage of criticism at World Economic Forum over policy and bank regulation

It should have been a chance to trumpet recovery in cosy Alpine surroundings. At Davos, David Cameron and George Osborne wanted to sell British austerity, discipline and economic stability to the world's most powerful people. It didn't quite work out like that.

The week started with dismal figures showing that Britain's economy had shrunk by 0.5% in the final quarter of 2010 and that questions were being asked about deficit-cutting without long-term growth. And instead of getting plaudits at the World Economic Forum's annual summit in Switzerland, wherever they went British ministers were confronted by economists casting doubt on British policy.

There was no respite when they met anxious financiers alarmed by "banker bashing". At a closed-door session today as the Alpine jamboree drew to an end, more than 40 bosses of banking and insurance companies met finance ministers from nations including Britain, Canada, France, South Africa, Turkey and Sweden.

A guest list obtained by the Observer reveals that those invited included Bank of America's boss, Brian Moynihan; Standard Chartered's chief, Peter Sands; the Lloyd's of London chairman, Lord Levene; the UK head of Santander, Ana Patricia Bot�n; and Aviva's chief executive, Andrew Moss.

In emollient form afterwards, Barclays' chief executive, Bob Diamond, said the get-together had been an opportunity to deliver "very heartfelt thanks" to governments for rescuing the banking system.

"We have to recognise, although there is some fatigue, that an awful lot has been achieved over the last few years," said Diamond. "We should say thanks to the central bankers and regulators because we're operating in a much safer system than a couple of years ago."

But France's finance minister, Christine Lagarde, made it clear that the discussion had been robust: "The best way for the banking system to say 'thank you' would be with good financing of the economy, sensible compensation packages and a refinancing of their capital."

Impatient with criticism of bonuses, tax avoidance and lending to small businesses, many banks used the occasion to turn up the volume in protest at what they see as undue punishment. JP Morgan's chief executive, Jamie Dimon, snapped last week that banks were not prepared to simply "bend over and accept it" from regulators. The Goldman Sachs president, Gary Cohn, declared that extra regulations on banks would simply encourage people to put their money into riskier hedge funds.

Some, particularly in Britain, are getting nervous ? a senior executive at one London-based bank said the tone of rhetoric from US firms was becoming concerning. In Britain, efforts to broker a peace deal between Westminster and the City, codenamed Project Merlin, have stalled. Osborne said: "The British government is trying to reach a new settlement with the banks whereby they lend more into the economy, contribute more in taxes and pay lower bonuses than last year."

Banks are holding out against efforts to curb telephone-number-sized bonuses. Goldman Sachs revealed on Friday that its chief executive, Lloyd Blankfein, had received a $600,000 pay rise, taking his remuneration to $13.2m for 2010 ? still far short of the $68m he scooped in 2007 but an indication that "restraint" is beginning to wane.

Osborne, under pressure from Liberal Democrat ministers in the coalition, is struggling to wring concessions from London banks which say the government's 50p top rate of tax is deterring international staff from moving to the UK, and any further crackdown will prompt them to make future investments overseas.

The chancellor urged patience: "When you've faced the biggest banking crisis for 80 years, fixing the system was never going to take place overnight."

Some of those visiting Davos from emerging economies sense an opportunity. Montek Ahluwalia, a senior Indian policymaker who is deputy chairman of his country's planning commission, suggested that instead of repeating their ill-fated quest for ever more opaque derivatives, banks should direct their money towards rapidly growing nations ? citing growth rates of 6% to 8% forecast for India and China this year.

"If they really want high returns, then that's where their capital should go," said Ahluwalia. "We will not be helped if too much financial innovation is producing instruments that aren't competitive and which we know are actually hugely risky."

Andrew Clark

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