G20 to keep stimulus

 

G20 countries agree it is too soon to begin withdrawing measures to end the global economic crisis and at talks in London this week will discuss coordinated actions to wind down trillions of dollars support and push forward financial reforms.

The United States will propose an outline for tougher global bank capital standards at the meeting of finance ministers, starting a process to eventually supplant the Basel II standards with a broader-based effort.

U.S. Treasury Secretary Timothy Geithner said a stronger capital accord was a critical part to make the financial system more stable by limiting the risk of large institutions failing.

"We're going to be outlining a framework of principles to begin a discussion not to reach agreement on but to discuss a framework of principles on a new international capital accord that will put in place, once the crisis is behind us, a more conservative framework of constraints on leverage in the financial sector across the major globally active financial institutions" he told a news conference.

The accord would be developed under the auspices of the Financial Stability Board, Geithner said, an international body that was recently expanded to include major emerging economies such as China, India and Brazil.

European finance ministers meeting in Brussels on Wednesday said the worst of the recession was over in the 16 countries that use the euro currency but ruled out an immediate end to the fiscal and monetary help.

A British government source said there was agreement on this in the Group of 20 developed and developing economies, whose finance ministers meet in London on Friday this week, and "everyone thinks it is certainly too early to declare victory."

Geithner agreed, saying that although the global economy has pulled back "from the edge of abyss" in the past year and was showing early signs of resuming growth, it was too early to let up on stimulative efforts. 

"We've come a very long way. We have a very long way to go still" Geithner said.

The G20 ministers are also expected to discuss a U.S. push for agreement on giving emerging market countries more voting power in the International Monetary Fund. A G20 source said Washington wanted at the very least a statement to be made on the issue when G20 leaders meet in Pittsburgh on Sept 24-25.

The ministers and central bankers will assess in London how far the world economy and banking system is recovering from two years of crisis.

"The worst is over for the time being" Jean-Claude Juncker, the chairman of euro zone finance ministers, said after new data confirmed only a 0.1 percent fall quarter-on-quarter in euro zone gross domestic product in the April-June period.

He said the time had "not yet come to withdraw the fiscal stimulus." But the euro zone ministers agreed they must be ready to withdraw the measures when the time comes and that this should be coordinated globally.

BROAD AGREEMENT

In London British finance minister Alistair Darling said the biggest risk to global economic recovery is complacency and it is too soon to withdraw stimulus measures.

"My view is that the biggest single risk to recovery is that people think the job is done" Darling told The Independent in an early edition of its Thursday newspaper.

A senior Canadian finance official echoed the European position, saying there were signs of economic stability in Canada but it was too early to unwind stimulus for the world economy. 

Governments across the world have spent trillions of dollars on economic stimulus packages, prompting a debate about how eventually to remove this support.

There are also questions about how widespread and sustainable the return to growth is. Economies could slump again if the stimulus is removed too soon, but inflationary pressures could grow if it is left in place too long.

BANKERS' BONUSES UNDER FIRE

EU ministers are also likely to push at the G20 meeting for a change in the culture of bankers' bonuses, which some believe helped cause the excessive risk-taking by financial institutions that led to the global financial crisis.

"The bankers are partying like it's 1999, and it's 2009" Swedish Finance Minister Anders Borg said. But some European finance ministers said it would be a challenge to persuade Britain to sign up to strict limits, as proposed by France.

Britain will propose that the G20 nations sign up to measures to curb excessive risk taking, including ensuring that banks spread out bonuses over five years and ending guaranteed payouts. The proposal also would require higher capital requirements for banks, according to UK officials.

French President Nicolas Sarkozy last week said he would propose caps and taxes on bonuses at the Pittsburgh leaders meeting.

The United States has taken a softer approach, proposing that shareholders get a vote on compensation packages and making compensation committees independent.

"There's a lot in common in terms of basic strategy" with Europe, Geithner said, adding that he looked forward to discussing the French proposals at the London meeting.