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Biotech stocks took a turn for the worse in 2009 as the major players dealt with regulatory, manufacturing and political issues as well as a deep recession, but their fortunes could turn in the new year if they get added patent protection.

They were the exception in what was otherwise a bullish year for health care stocks, which benefited as investors sought defensive plays in a turbulent market.

Biotech stocks were the laggards of the Standard & Poor’s 500 Health Care index, on track to post a nearly 8 percent loss for the year, while the rest of the health care sector has logged gains of up to 66 percent, according to FactSet.

The decline in bellwethers such as Amgen and Genzyme was a key factor in weighing down the overall sector. On a broader scale, concerns included a backlog of drug approvals at the Food and Drug Administration, a decline in buyout activity, and fears over health care reform.

While the S&P 500 index is on track to gain about 25 percent in 2009, its large biotech components are down about 7.8 percent. The Nasdaq Biotechnology Index, with a broader array of biotech companies, rose 17 percent, but that pales in comparison with the broader Nasdaq composite, which is set to gain about 45 percent.

Pharmaceutical companies, which saw a flurry of buyout and merger activity, are among the strongest performers with a 25 percent boost, a reversal from a lackluster 2008. But the lines between pharmaceutical and biotech companies are diminishing through a range of buyout and development deals. Traditional pharmaceuticals are made by synthesizing chemicals, while biotech-based drugs are made using living cells.

Meanwhile, hospital operators and insurers are on track to rally 62 percent, despite the recession, on hopes that health care reform in Washington could result in more insured patients and revenue in the future.

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Air Canada has become the first Canadian airline to offer in-flight Internet access to at least some of its passengers.

The airline launched a 10-week trial period Friday, during which select flights on the Montreal-Los Angeles and Toronto-Los Angeles routes will offer Web surfing.

Access will cost $9.95 (U.S.) for a laptop and $7.95 for smartphones and PDAs.

The service, known as Gogo, will initially be available only when flying over the territorial U.S.

At the end of the 10-week trial on Jan. 29, the airline will consider expanding the service to other routes.

A spokesperson for Air Canada said a full launch of the service will depend on the outcome of the trial, regulatory approval and developing the necessary ground infrastructure in Canada to provide a domestic network.

Initially, the system will be available on Aircell, a U.S.-only high-speed mobile network for aviation. Air Canada said it hopes to assist in the development of a Canadian air-to-ground network in the near future.

The airline’s chief domestic competitor, WestJet, said it has no immediate plans to offer wireless on its flights but said it will continue to evaluate the concept.

In-flight Internet access through the Gogo network is already available on some U.S. airlines, including Virgin America, Delta, AirTran and American Airlines.

With files from Reuters

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Latvia is close to ending a dispute with international donors including Sweden and the International Monetary Fund that jeopardized its bailout loan and raised devaluation speculation, the premier’s office said.

“Latvia is on the way to coming to an agreement with its international lenders,” said Liga Krapane, Prime Minister Valdis Dombrovskis’s spokeswoman. The premier in Helsinki today told reporters the country is “working on additional measures,” adding he expects an “intermediate conclusion” when European Union Monetary Affairs Commissioner Joaquin Almunia visits Riga on Oct. 13.

The IMF, European Union and Sweden, which agreed a 7.5 billion-euro ($11 billion) loan in December, have heightened the pitch of calls urging Dombrovskis to commit to budget cuts of 500 million lati ($1 billion) a year until 2012. Swedish Premier Fredrik Reinfeldt said on Oct. 5 Latvia “must correct” its deficit and Riksbank Governor Stefan Ingves has said the country may be left “in the cold” if it doesn’t comply.

“The message has been heard,” said Nils Muiznieks, a political scientist at the University of Latvia, by phone yesterday. “The chances of coming to an agreement have improved massively” after Swedish admonishments.

Finance Minister Einars Repse has had meetings with officials from the Nordic states, EU members, the IMF, the World Bank and the U.S. Treasury, and “everyone was in agreement that Latvia has to work according to the program,” he told Latvian Independent Television last night.

‘Depressive Forces’

Repse added the government must find places to cut expenditure and may have to introduce a real-estate tax to meet the terms of the loan.

Sweden’s banks are the biggest in the Baltic states. Stockholm-based Swedbank AB, the region’s biggest lender, rose 4.5 percent to 63.50 kronor in Stockholm. SEB AB rose 1.1 percent to 45.2 kronor. The krona gained as much as 0.5 percent against the euro, was trading at 10.3113 ending two days of losses.

The yield on Latvia’s 5.5 percent government bond due March 2018 dropped 4 basis points today to 6.94 percent. The OMX Riga stock index closed 0.4 percent higher after plunging 3.1 percent yesterday. The lats was little changed at 0.7095 per euro.

Sweden’s debt office said in March that it would lend Latvia about 720 million euros, as part of the international loan, next year. The country currently has the rotating presidency of the European Union.

‘Depressive Forces’

The Baltic region, part of the Soviet Union until 1991, is enduring the severest recession in the EU; Latvia’s output slumped 18.7 percent in the second quarter, Lithuania plunged 20.2 percent and Estonia’s economy contracted 16.1 percent. The three will face “depressive economic forces” through next year, SEB said in an Oct. 7 report.

Donors have questioned the commitment of Latvia to fulfilling the terms of its loan after a report revealed some of the promised cuts weren’t implemented. Latvian public wages have fallen about 5 percent in the first half of the year, compared with a targeted 35 percent agreed, the IMF said in an Oct. 2 report. The Washington-based fund also said that a reliance on “one-off” measures to cut the budget deficit threatens to delay the euro adoption strategy.

Latvia, which like Lithuania and Estonia pegs its currency to the euro, has tried to persuade donors it can achieve an agreed 8.5 percent deficit of gross domestic product next year by cutting its budget by 325 million lati, 175 million lati less than the lenders say is necessary. Lawmakers have also balked at donor recommendations to introduce a real-estate tax.

‘Basically Agreed’

The Finance Ministry is now preparing additional measures to find the 175 million lati in budget cuts, spokesman Aleksis Jarockis told the Baltic News Service today no telecheck payday loans.

The government has “basically agreed to prepare additional measures to reach the size of the fiscal consolidation which would satisfy the international loan providers,” Dombrovskis told the British Broadcasting Corp. today.

“Most likely they will reach an agreement somewhere in between” 325 million and 500 million, said Martins Kazaks, chief economist of Swedbank’s Latvian unit. Lawmakers have until November to reach an agreement on the size of the cuts.

“If Latvia does not cut, then they will have to make expenditure cuts three times those now” if loans are suspended, he said. “If you have the option of losing a finger compared to a whole arm, then go for the finger.”

Lawmakers in Riga, mindful of elections in a year, have decried the bailout terms and Dombrovskis is struggling to soften the blow for households. His efforts have thrown oil on the flames of speculation that Latvia may be forced to devalue the lats.

Mortgage Proposal

The premier on Oct. 6 asked civil servants to look into the feasibility of capping mortgage holders’ liabilities to the value of the collateral offered against their loans. That was interpreted by some investors as a sign the government is paving the way for a devaluation by limiting the domestic losses such a move would incur.

The central bank in an Oct. 7 statement questioned the timing, arguing such legislation “should have been adopted earlier, for purposes of slowing down lending, or it should be postponed: this is the most inappropriate moment possible.”

A devaluation would hit corporate loans and bring with it a “wave of insolvencies,” according to Commerzbank AG currency strategists Lutz Karpowitz and Antje Praefcke, who say the mortgage proposal is no prelude to a controlled devaluation.

The banks have signaled they may rethink their commitment to the country if the proposed legislation were to pass.

‘Limits for Everything’

“You always have to evaluate the conditions within which you operate, but Latvia is one of our four home markets and we have no other intentions than to keep it as one of our home markets,” Swedbank spokesman Thomas Backteman said by telephone today. “But there are of course limits for everything, including our presence in individual countries, if the legal system or other things change radically and make it impossible to operate there.”

This isn’t the first time Latvia has stared down the tunnel of ruin. Lawmakers in June struck an 11th hour agreement on budget cuts to satisfy lenders and ensure the flow of payments. That agreement was pushed back until after municipal and European parliament elections.

The difference now, is Latvia is no longer in danger of running out of money after 1.6 billion euros from the EU, IMF and World Bank was transferred, enough to last at least until March, said Annika Lindblad, an analyst with Nordea AB.

Political efforts to contain the fallout of the recession come as households handle wage cuts that make loan repayment impossible and slumping property values. House prices fell 71 percent in June from a peak in March 2007, according to real- estate broker Latio.

More than half of Latvian mortgages issued by Swedbank exceeded the value of their collateral at the end of the second quarter, Jenny Clevstrom, a bank spokeswoman in Stockholm, said on July 24.

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Dominique Strauss-Kahn is trying to keep the spotlight on the International Monetary Fund as the world’s focus shifts from the financial crisis to economic recovery.

With IMF members gathering in Istanbul this week, its managing director wants to turn the lender into an insurance fund that they can draw on in difficult times. That would expand its role beyond giving loans to distressed economies. His problem is that some of the 186 members aren’t ready to give power to an IMF they say is controlled too much by rich nations.

“It’s all very well for him to be arguing this is the role the fund should play,” Ngaire Woods, a professor of international political economy at Oxford University, said in an interview. “But the legitimacy problem the fund has to overcome to be a trusted reserve pool is massive.”

The financial crisis has seen the IMF rescue economies from Hungary to Ukraine and put it back on the front line of global policy making. As the world recovers, Strauss-Kahn, 60, says a central fund worth as much as $1 trillion would help prevent the global imbalances that led to the crisis. That’s because nations would feel less need to build up currency reserves during times of growth to protect themselves from future turmoil, he says.

If successful, Strauss-Kahn’s strategy may have the effect of slowing the purchases of dollar-denominated securities such as U.S. Treasury bonds that kept global interest rates low before the crisis.

Officials from emerging economies want assurances that a shift in voting power at the Washington-based IMF will continue in their favor. Germany has 5.9 percent of the votes at the IMF and China has just 3.7 percent even though China is now a bigger economy.

‘Legitimacy’

Mexican central bank Governor Guillermo Ortiz said in Istanbul on Oct. 5 he’s concerned “legitimacy” is “not likely to happen anytime soon.” His Brazilian counterpart Henrique Meirelles said a day earlier that “self-insurance works better.”

“The IMF is accountable to its shareholders and that’s going to be an issue” for Strauss-Kahn, Nobel Prize-winning economist Joseph Stiglitz said in an interview in Istanbul. “Some countries would like to return to business as usual as the crisis passes.” While Strauss-Kahn is doing a “fantastic” job, “it’s very hard to take charge of such a complex institution and navigate it through change.”

To succeed, Strauss-Kahn needs to win over countries that the IMF alienated in the late 1990s during the Asian crisis. Then, the lender forced governments from Indonesia to South Korea to cut spending, raise interest rates and sell state-owned companies in return for loans, attracting criticism that it prolonged the economic pain.

‘Long Memories’

While the IMF has retreated from attaching as many strings to loans, Thailand’s Finance Minister Korn Chatikavanij in May said seeking IMF help still carries a stigma in Asia. Asian countries have created their own reserve pool and no economy from the region has needed to turn to the lender in the current crisis.

“Asia governments do have long memories,” said Huw McKay, senior international economist at Westpac Banking Corp. in Sydney. “They remembered how they were treated in the Asian crisis and wouldn’t want to put themselves into that position again.”

Strauss-Kahn says the crisis shows it’s time both for the IMF to retool itself and Asian economies to break with the past.

“Given the costs associated with reserves accumulation, there is clearly a need for reliable emergency financing and hence for a global lender of last resort,” he said last week in Istanbul. “The fund has the potential to serve as an effective and reliable provider of such insurance.”

Strauss-Kahn’s Report

Strauss-Kahn is scheduled to flesh out his plan in a report to IMF officials next year.

Emerging nations are also winning more power at the fund. President Barack Obama and other Group of 20 leaders last month agreed to a transfer of at least 5 percentage points of so- called quotas from countries with disproportionate influence at the fund. Quotas determine voting shares and access to IMF loans.

Strauss-Kahn also already has an insurance system with the so-called flexible credit line that has attracted Mexico, Poland and Colombia. While reserved to economies it deems as sound, it comes with no strings attached.

Still, the IMF would require a “substantial increase” in resources for it to be global, according to Strauss-Kahn. While the IMF’s finances got a boost in April when G-20 leaders agreed to triple its resources to $750 billion, the additional $500 billion is not necessarily permanent.

‘Temporary’ Resources

Bundesbank President Axel Weber said yesterday there are “moral-hazard issues” arising from “the vast increase in fund resources,” which “should be viewed as a temporary measure.”

For Strauss-Kahn, the risk is that the IMF misses the chance presented by the crisis to take on a central role in preventing future crises, said Jim O’Neill, chief economist at Goldman Sachs Group Inc.

“The IMF has been given loads of opportunities here and needs to seize the moment,” O’Neill said. “I’m not convinced they will. Strauss-Kahn is doing a good job, but they should be bolder. They are still beholden to those who own them.”

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U.K. consumer confidence jumped in September by the most since 1995 as optimism about the economy’s prospects rebounded, GfK NOP said.

An index of sentiment rose to minus 16, the highest since January 2008, from minus 25 the previous month, the market researcher said in an e-mailed statement today in London. A gauge of confidence in the economy for the next year increased 13 points to 4, the highest in more than a decade.

“Psychologically important is the fact that confidence in people’s own personal finances for the next 12 months and confidence in the general economy over the next 12 months both moved into positive territory, after being in the red for well over a year,” Nick Moon, Social Research managing director at GfK, said in the statement.

Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, today reported the smallest drop in same-store sales for two years and said confidence among customers “has reached the bottom.” Chancellor of the Exchequer Alistair Darling predicted this week that an economic recovery may be under way by the end of the year.

The pound rose for a second day against the dollar after the GfK report. The U.K. currency traded at $1.6058 as of 8:49 a.m. in London.

The index of personal finances in the next year rose 5 points to 5, the report showed. The index measuring the climate for major purchases rose 11 points to minus 15. GfK surveyed 1,999 people from Sept. 4 to Sept. 13.

M&S Sales

Retailers saying sales increased this month from a year earlier outnumbered those reporting declines by 3 percentage points, compared with a reading of minus 16 points in August, the CBI said yesterday.

M&S said that sales at U.K. stores open at least a year fell 0.5 percent in the 13 weeks ended Sept. 26. That beat the average estimate of nine analysts surveyed by Bloomberg News for a 1.6 percent drop. The retailer raised its margin forecast.

Moss Bros Group Plc, the U.K.’s third-largest suit retailer, said yesterday it may restart opening new stores this year amid signs the decline in sales is slowing.

The U.K. economy shrank 0.6 percent in the second quarter, less than previously estimated, as the slump in manufacturing and construction started to ease, the Office for National Statistics said yesterday.

Today’s report still showed that consumers, who have 1.5 trillion pounds ($2.4 trillion) in debts, may be getting keener to save. GfK’s measure of whether now is a good time to save rose to minus 5 from minus 10. The household savings ratio, a measure of savings as a proportion of post-tax income, jumped to 5.6 percent in the second quarter, the most since 2003, the statistics office said yesterday.

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Mexico’s central bank left its benchmark interest rate unchanged for a second month on an improved economic outlook and said future decisions may depend on the inflationary impact of fiscal legislation in Congress.

The bank’s five-member board, led by Governor Guillermo Ortiz, held the rate at 4.5 percent, matching the forecasts of all 19 economists surveyed by Bloomberg. The bank cut borrowing costs at its first seven monthly meetings of 2009, lowering the rate by 3.75 points from 8.25 percent at the end of 2008.

The central bank may raise borrowing costs in the first quarter of next year if it sees signs that changes to tax laws approved by lawmakers are fueling inflation, said Pedro Tuesta, senior economist for Latin America at 4Cast Inc. in New York. The bank also said future decisions would depend on the economy.

“If there’s an impact that substantially modifies inflation, they may have to think about raising rates,” Tuesta said in a telephone interview. “They probably won’t do anything until they see the actual impact in February or March.”

On Sept. 8, President Felipe Calderon proposed tax legislation as part of his 2010 budget proposal that would increase income, corporate and sales taxes in a bid to offset diminishing oil revenue and prevent a credit-rating reduction.

Tax Proposal

The proposal calls for imposing a new 2 percent sales tax that would be used to fight poverty. The income tax rate for high-earning individuals as well as corporations would also rise to 30 percent, before dropping to 29 percent in 2013 and returning to 28 percent in 2014.

Calderon’s economic package, if approved by lawmakers, would add less than 1 percentage point to the inflation rate, Finance Minister Agustin Carstens said Sept. 9.

“You have higher taxes, and that should increase prices,” said Benito Berber, an economist with RBS Securities Inc. in Stamford, Connecticut. “It’s going to be inflationary.”

The government also said this month it plans to gradually raise gasoline and diesel prices as it did before it suspended increases in January.

The bank may raise rates as early as November if the government’s plan to boost fuel prices and increase taxes spurs inflation, said Mario Correa, an economist at Grupo Financiero Scotiabank in Mexico City.

“Inflation hasn’t ceased to be a concern,” Correa said in a telephone interview. “It’s still well above the official target.”

Inflation Outlook

The annual inflation rate fell to 5.08 percent in August, the lowest level in more than a year, as costs declined for tourism packages, local telephone services and avocados.

The central bank forecasts inflation at between 4.75 percent and 5.25 percent in the third quarter, and between 4 percent and 4.5 percent in the fourth quarter. Its inflation target is 3 percent. The government forecasts annual inflation will be 4.3 percent at the end of this year.

Banco de Mexico said in a statement accompanying its decision today that the economy will improve in the second half of the year after a “highly severe” contraction in the first half.

“The most recent indicators for industrial production, employment and consumer confidence indicate that the economy touched bottom and is beginning an expansionary phase,” the bank said.

Mexico’s $1.09 trillion economy contracted 10.3 percent in the second quarter and job losses accelerated as the recession in the U.S., which buys about 80 percent of Mexican exports, sapped demand for its products.

The central bank forecasts the economy will shrink as much as 7.5 percent this year, which would be the biggest contraction since the 1930s.

Auto Production

The recession in Latin America’s second-largest economy is easing on restoration of credit, rising auto output and growing consumer demand in the U.S, Deputy Finance Minister Alejandro Werner said yesterday. Industrial production fell 6.5 percent in July, which was less than the 9.1 percent forecast by economists in a Bloomberg survey.

“All indicators point toward a bottoming of the economy in the second quarter,” Berber said. “There’s no reason to continue cutting.”

At 4.5 percent, the key lending rate is the lowest since Ortiz began targeting the overnight lending rate in 2005. Previously, Banco de Mexico implemented monetary policy by targeting the money supply through a system known as the “corto.”

Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Cheaper loans also can spur inflation by strengthening demand.

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Israel’s August inflation figures may provide a sneak preview for investors eager to learn whether Bank of Israel Governor Stanley Fischer will raise rates again at the end of the month.

Fischer, who became the first central bank governor to lift rates since signs of easing in the global recession began, may decide on a further increase if the inflation rate is higher than expected, said Ayelet Nir, chief economist at Tel Aviv- based Israel Brokerage & Investments Ltd. The components of the August consumer price index, and whether they show demand-pull inflation or one-time, government-initiated increases, will also play a role, she said.

“The difficulty in the decision is that the Bank of Israel is trying on the one hand to avoid high inflation and on the other hand not to harm growth,” Nir said. Growth “is still very fragile so the decision is very, very hard.”

Fischer has been trying to find a balance between unwinding an expansionary monetary policy while containing a shekel rally in a country where exports make up almost half of gross domestic product. The bank said its Aug. 25 decision to raise the key rate by a quarter point to 0.75 percent was aimed at returning inflation to within the target range of 1 percent to 3 percent.

If Fischer raises rates too early he can harm growth, both because it may cause the shekel to appreciate, which hurts exporters, and also because it dampens spending, Nir said. On the other hand, inflation also has repercussions for growth, she said.

Unanimous

The August consumer price index is expected to dip to 3 totally free credit score.2 percent from 3.5 percent the previous month, according to the median estimate of a Bloomberg survey of nine economists. The Jerusalem-based Central Bureau of Statistics will report the inflation data at 6:30 p.m. on Sept. 15.

All four central bank officials who participated in the rate-setting meeting last month favored raising the rate, with one of the four supporting a half-point increase, according to the minutes.

“If inflation is as expected or higher, there is a good chance of another rate hike,” said Jonathan Katz, a Jerusalem- based economist at HSBC Holdings Plc., who predicted the last increase. The minutes of the last rate meeting show that the “monetary bias is still toward higher rates.”

Israel’s growth rate is expected to be flat this year, and will rise to 2.5 percent in 2010, the Bank of Israel said Sept. 1. The bank’s previous forecast in April was for a 1.5 percent contraction this year and growth of 1 percent next year.

Water Tax

Much of the rise in the August consumer price index is likely to be due to the government’s new drought tax on water, which isn’t relevant in the interest rate decision, Nir said.

There will also be “demand-based inflation,” she said, citing increases in the consumer confidence index, retail sales and credit card spending. “Part of the price increases are because of this.”

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Russia is poised for an economic recovery after domestic cargo volumes, a leading indicator for growth, rebounded from the steepest slump since at least 2000.

The CHART OF THE DAY shows the year-on-year change in an index of freight transport by rail, road, air and pipeline, in red, rebounded from a record low in April. Economic growth, in white, extended annual declines through the first half.

“The recovery in cargo turnover provides more proof of an improving economic outlook,” said Georgy Tarakanov, Moscow- based analyst at VTB Capital, the investment-banking unit of Russia’s second-biggest lender. “The slump is easing and that is seen in the rising volumes of rail shipments.”

The economy shrank a record 10.9 percent in the second quarter from a year earlier, after declining 9.8 percent in the first, following 10 years of annual expansion averaging almost 7 percent. Domestic cargo volumes have rebounded 14 percent from a six-year low in April to 377.8 billion metric tons a kilometer (0.6 mile).

“The only accurate proxies that tell you the current state of affairs are railway cargo and power,” said Pavel Teplukhin, president of Troika Dialog, Russia’s oldest investment bank.

OAO Russian Railways, whose sales account for almost 3 percent of nominal gross domestic product, said cargo traffic advanced 2.5 percent in August from the previous month. The shipments fell 23 percent in the first half from a year before. The economy will contract 7.2 percent this year, according to the median estimate of 10 economists surveyed by Bloomberg.

(To save a copy of the chart, click here.)

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World leaders gathering in Pittsburgh this month may take the biggest step to curbing the pay and profits of bankers after their economic policy makers narrowed differences over bonuses and capital rules.

Finance ministers and central bankers from the Group of 20 nations left weekend talks in London with a regulatory blueprint for a financial industry whose risk-taking triggered a global recession and required taxpayer-funded bailouts. The pledge to shore up the international financial system spurred European and Asian shares higher today.

“The G-20 has shown once again that governments from around the world can come together to agree on the global governance the new global economy needs,” U.K. Prime Minister Gordon Brown said. “This is an important step on the way to Pittsburgh.”

With the G-20 authorities vowing to sustain a nascent economic recovery, the U.S. and euro area found common ground on the push to revamp bank rules. The effort may still founder on trans-Atlantic divisions. And the specifics, being written for the Sept. 24-25 summit to be chaired by U.S. President Barack Obama, run the risk of being unenforceable, say analysts.

‘Living Wills’

Finance chiefs agreed that elements of a global pay code include forcing banks to “claw back” cash awards if earnings falter; better tying compensation to long-term performance and base pay; deferring payments and disclosing more on what they hand top earners, according to a Sept. 5 statement.

Banks will also have to curb leverage and raise the amount and quality of assets they keep in reserve once growth takes hold. They were also prodded to use profits to raise capital and lending and to outline “living wills” on how to fold international operations in crises.

The ministers left it to the Financial Stability Board, a Basel-based panel of regulators that the G-20 established five months ago, to flesh out the plan. The board will also research whether there needs to be a limit on bonuses as a percentage of a bank’s profits.

Separately, a panel of central bankers and regulators that oversees the Basel Committee on Banking Supervision yesterday agreed on new standards calling for lenders to raise the quality of their capital, introduce a leverage ratio and devise ways to boost reserves when the economy is robust.

“Capital requirements even during non-crisis periods have to have a larger buffer,” former Federal Reserve Chairman Alan Greenspan said today via satellite to a conference in Mumbai. “We do need significant changes. There’s no substitute for capital.”

‘No Teeth’

Even if the deadline for detailed proposals wasn’t in less than three weeks, officials would struggle to control how bankers pay themselves, said Nicholas Stretch, a London-based partner at law firm CMS Cameron McKenna.

“There’s no teeth here,” Stretch said. “If you push too far in one direction, banks will just move in the other.”

Political leaders expressed doubts that financial-industry interests can be overcome.

“Will the U.S. follow us? Will President Obama have the courage to tackle the ancient order?” French Prime Minister Francois Fillon said yesterday in Seignosse, southwestern France. “We will know in a few days if actions live up to speeches.”

Public Anger

The weekend agreement built on G-20 efforts born in the wake of the crash of the U.S. housing market and the collapse of Lehman Brothers Holdings Ltd. almost exactly a year ago. The ensuing crisis led to $1.6 trillion in bank losses and writedowns.

The G-20 is also seeking to quell public anger after governments rescued banks only to see them soon return to profit and awarding bonuses.

“Greed was one of the reasons for this crisis,” Italian Finance Minister Giulio Tremonti said. Because of the bailouts, “limiting bonuses isn’t only about how much a banker earns, but it’s about the relationship between banks and governments.”

Goldman Sachs Group Inc. set aside a record $11.4 billion for compensation and benefits in the first half of 2009, up 33 percent from a year earlier, while Morgan Stanley allotted 72 percent of its second-quarter revenue.

In France, BNP Paribas SA and Societe Generale SA were among the banks that bowed last month to President Nicolas Sarkozy, deferring for three years two-thirds of bonuses and paying a third of them in shares. They also vowed to stop offering guaranteed payouts to new hires.

‘Common Purpose’

“We need to bring the sense of common purpose and urgency that we demonstrated at the peak of the crisis to the challenges of restoring growth and to reforming the financial system,” said U.S. Treasury Secretary Timothy Geithner, who wants new capital rules in place by the end of 2012.

Finance ministers from France and Germany, who spoke to reporters together after the meeting, claimed credit for what they called a successful push to contain bonuses, overcoming initial resistance from the U.S. and U.K. The Europeans relented on a proposal to limit individuals’ compensation.

“Without Germany and France insisting, we wouldn’t have come this far,” said Germany’s Peer Steinbrueck. Christine Lagarde of France called bonuses “quite outrageous.”

While the ebbing of the crisis may still slow the reform effort as banks regain strength and attention wanes, the re- election campaigns of German Chancellor Angela Merkel this month and the U.K.’s Brown next year may provide momentum.

Basel II

“The finance ministers provided a good foundation for the leaders meeting,” said Daniel Price, who organized last November’s G-20 summit in Washington for President George W. Bush and is now a partner at law firm Sidley Austin LLP in Washington. “Leaders shouldn’t lapse into demonizing or demagoguing particular products or practices.”

They also narrowed a trans-Atlantic divide on capital rules. The U.S. agreed to implement Basel II capital rules, acknowledging French criticism that Obama’s administration was beginning a new reform drive without enacting existing capital standards.

Setting aside more capital may hurt banks’ earnings. That concern pushed up the cost of protecting their bonds from default by the most in a month in Europe on Sept. 2. Credit- default swaps on the Markit iTraxx Financial index linked to 25 European banks and insurers jumped 5.5 basis points that day to 94 basis points, the biggest one-day increase since Aug. 8, according to JPMorgan Chase & Co. prices.

IMF Raises Forecast

Expressing caution on the outlook for the world economy, the G-20 officials judged it premature to start unwinding record-low interest rates and more than $2 trillion in fiscal stimulus. At the same time, they agreed the eventual exit from emergency measures should be coordinated across borders to avoid distorting markets.

The policy makers were told by the International Monetary Fund that it had raised its forecast for global growth next year to 2.9 percent from July’s 2.5 percent estimate. The Washington- based lender cut its projection for contraction this year to 1.3 percent from 1.4 percent, according to an official from a G-20 government, citing a paper prepared for the meeting.

The 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 U.S., the U.K. and the European Union.

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Former Bank of England policy maker Stephen Nickell said Britain needs to build more houses than he estimated last year because the recession has hit construction.

At least 237,800 extra homes are required each year until 2031, the National Housing and Planning Advice Unit, of which Nickell is chairman, said in a report published in London today. That’s 3 percent more than the group said would be needed in June 2008.

The deepest economic contraction in at least a generation has exacerbated a housing-market crash after prices tripled in the decade to 2007. Homebuilders such as Barratt Developments Plc and Redrow Plc last year had to dump unsold homes at knock- down prices and halted almost all new developments business card design.

“The recession will have little impact on the number of homes that we need to build over the next 30 years,” Nickell said in a statement. “There are also likely to be increasingly serious wider economic and social consequences if we do not manage to bring the supply and demand for housing back towards balance and start tackling the backlog of unmet demand.”

Nickell’s housing unit, which advises the government, makes its estimates based on affordability and the number of new households it expects will be created.

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