WASHINGTON | Sat Apr 16, 2011 12:56pm EDT
(Reuters) – World finance leaders on Saturday chastised the United States for not doing enough to shrink its massive budget deficit and warned that fiscal strains in rich nations threaten the global recovery.
Although global tensions over the possibility of currency wars and Europe’s growing debt crisis continue to simmer, finance ministers in Washington for semi-annual talks also took sharp aim at the United States’ $14 trillion debt.
While most of the criticism came from emerging market economies, some rich nations also joined the chorus.
“The fiscal situation in the advanced economies gives us great concern, and it is in this area that we see the major risks to the global economy,” Russian Finance Minister Alexei Kudrin told the International Monetary Fund‘s advisory panel.
The IMF this week noted that the U.S. budget deficit was on course to hit 10.8 percent of nation’s economic output this year, tying Ireland for the highest deficit-to-GDP ratio among advanced economies. It urged Washington to move quickly to put a credible plan in place to tighten its belt.
The Obama administration and the U.S. Congress have engaged in a big battle over how best to reduce the red ink. Republicans have sought to use the need to raise the nation’s $14.3 trillion debt limit to avoid a default as a lever to extract deep spending cuts.
The Republican-led House of Representatives on Friday approved a plan to slash spending by nearly $6 trillion over a decade and cut benefits for the elderly and poor.
President Barack Obama, who has offered a competing vision to curb deficits by $4 trillion over 12 years, said on Thursday the Republican plan would create “a nation of potholes.”
The White House has been wary about withdrawing fiscal support for the economy too quickly, and Treasury Secretary Timothy Geithner told fellow finance ministers on Saturday caution was needed.
“We are committed to fiscal reforms that will restrain spending and reduce deficits while not threatening the economic recovery,” he said.
But even as Geithner said the United States recognizes the need to address its budget deficit, he was quick to say that others whose practices contribute to global imbalances must also change.
“However, others, especially those whose fundamentals call for greater exchange rate flexibility, must also contribute,” Geithner said.
The United States has repeatedly called for China to relax its limits on the yuan currency.
Dutch Finance Minister Jan Kees de Jager warned that if the United States and other advanced nations move too slowly it could undermine confidence in the global economy.
“Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues, with repercussions on confidence and the still fragile financial sector,” de Jager said. “Debt dynamics in other advanced economies, including the United States, are of concern.”
Yi Gang, a deputy governor of China’s central bank, called for “more rigorous” efforts by advanced economies to tighten budgets and said the IMF needs to strengthen its monitoring of these rich nations.
Kudrin, in remarks clearly targeted at the U.S. Federal Reserve, said central banks that have purchased government debt to keep interest rates low were abetting fiscal profligacy.
The Fed is on course to complete the purchase of $600 billion in U.S. government debt by the end of June, which would take its total purchases of mortgage-related and government debt since December 2008 to near $2.3 trillion.
Echoing some Fed officials and Republican lawmakers in Washington, Kudrin said those purchases blurred the line between monetary and fiscal policy in a way that could jeopardize a central bank’s independence.
“We observe this process with some wonderment, since it amounts to the monetization of those countries’ budget deficits,” Kudrin said.
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WASHINGTON | Fri Apr 15, 2011 10:37am EDT
(Reuters) – The world’s big economies on Friday tried to overcome their differences and flesh out a plan to make the world economy less prone to booms and busts.
The challenge of getting the Group of 20 to agree on how to spot and fix dangers to global growth comes as policymakers are worried about more immediate threats — high oil prices, huge debts in some rich nations and unrest in the Middle East.
China, at the center of the ambitious global policy plan, signaled it will only let its tightly controlled yuan currency rise in value at its own speed.
Still, the G20 as the major forum for global policy coordination wants to find ways to insulate the economy from some of the imbalances that led to the 2007-2009 crisis and the worst global recession since World War Two.
Canadian Finance Minister Jim Flaherty said addressing imbalances between export-rich and debt-burdened countries that have long plagued the global economy was a priority of the G20, which accounts for 85 percent of world output.
But it has become hard to find agreement on just how to reform the world’s financial system now that the darkest days of the financial crisis have passed. The G20 is trying to settle its differences on the imbalances plan in time for a leaders’ summit November.
Even if there is agreement, countries will not be bound to follow any policy recommendations that emerge from the monitoring of their policies but officials hope peer pressure will work.
Leaders of the BRICS kept up their calls for a monetary system less reliant on the U.S. dollar at a summit in China this week.
BRICS STAND FIRM
China’s central bank governor, Zhou Xiaochuan, stayed at home to attend the BRICS summit but made sure his voice was heard in Washington on the key topic of currency reform, reiterating that currency reform in China will take place gradually.
U.S. officials said ahead of the G20 meeting that currency flexibility was vital to correct excessive trade surpluses.
South African President Jacob Zuma, speaking in China, blasted the United States for its super-loose monetary policies and over-spending, which he said threatened the world economy.
The Federal Reserve’s $2 trillion bond-buying program, designed to stimulate the U.S. economy, has been blamed by emerging economies for driving down the dollar’s value and unleashing destabilizing waves of “hot money” into emerging markets in search of higher yields.
A cloudy outlook for global growth complicates efforts to find unity about how to add stability to the economic system.
High oil and food prices, the euro zone’s sovereign debt crisis, political infighting over the massive U.S. budget deficit and the impact of Japan’s earthquake, tsunami and nuclear crisis all pose risks to the recovery from recession.
G20 officials on Friday were pushing for a deal on how to apply new guidelines to identify countries with excess trade deficits or surpluses and too much debt.
“It is a matter of credibility for the G20 that we agree on the indicative guidelines this weekend,” said Olli Rehn, the European Union’s economic and monetary affairs commissioner.
The G20 wasn’t expected Friday to name specific countries that spend or save too much, but if it did, the United States and China would almost certainly top the list.
It would probably include others. French Finance Minister Christine Lagarde said Thursday the biggest economies — those representing 5 percent of total G20 output — might get special scrutiny. That would also include France, Germany and Japan.
Beyond that the G20 hopes to discuss how to apply guidelines. That might be done through computer modeling, with sources telling Reuters four different models for identifying imbalances were being discussed.
Reducing budget deficits is crucial too. The IMF this week said the United States may have a hard time meeting a G20 goal of halving its deficit by 2013.
President Barack Obama presented a plan this week to cut the deficit by $4 trillion over 12 years, but his former economic adviser said the country should wait until after growth is strong enough to warrant higher interest rates.
(Reporting by Reuters IMF/G20 team; Writing by Glenn Somerville, editing by William Schomberg and Leslie Adler)
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