G-7 Vows to Keep Economic Stimulus Even as Budget Deficits Grow
By Simon Kennedy and Simone Meier
Feb. 7 (Bloomberg) -- Group of Seven finance ministers pledged to press ahead with economic stimulus measures even as investors intensify their focus on mounting budget deficits.
“We need to continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track,” Canadian Finance Minister Jim Flaherty told reporters yesterday after chairing a meeting of counterparts and central bankers from the G-7 in Iqaluit, Canada.
Governments face a growing dilemma as they seek to fortify recoveries from last year’s recession at a time when rising sovereign debt burdens are being punished by investors and threaten to hobble future expansion. The MSCI World Index of stocks fell to its lowest since October this week amid concern Greece and some other European nations may default.
“They are running a gauntlet, hemmed in between debt crisis on the one side and a double-dip recession on the other,” said T.J. Marta, chief market strategist at Marta On The Markets LLC, a financial-research firm in Scotch Plains, New Jersey.
Greece is struggling to persuade financial markets it can restrain the European Union’s largest budget shortfall without outside assistance, while borrowing costs are also rising for Portugal and Spain. Credit-default swaps on the debt of all three countries rose to record highs this week.
European finance ministers said they will help ensure Greece tackles its deficit and European Central Bank President Jean-Claude Trichet said the bank is “confident” the country will cut its gap below the EU’s limit of 3 percent of gross domestic product in 2012 from 12.7 percent. U.S. Treasury Secretary Timothy F. Geithner said European officials had committed to handle Greece “with great care.”
“The message was clearly that the European members of the Group of Seven have confirmed the substance and significance of the plan put together by Greece,” French Finance Minister Christine Lagarde said. “The European members of the G-7 will make sure it is managed.”
Deutsche Bank AG is warning that the increase in the cost of insuring against debt defaults by peripheral European nations may be a “dress rehearsal” for the U.S. and U.K., whose own budgets deteriorated during the financial crisis and recession.
The G-7 officials, who oversee about half of the world economy, are betting that spending now will generate enough economic growth to help erode their fiscal imbalances and make it easier for them to pull back later.
“The position for most countries is to support the economies now and get the budget deficit down as the economy recovers,” U.K. Chancellor of the Exchequer Alistair Darling said in an interview in Iqaluit.
With the International Monetary Fund calculating debt in advanced Group of 20 economies reaching 118 percent of GDP in 2014, up from about 80 percent before the crisis, some nations attracting the ire of investors and credit rating companies.
Standard & Poor’s last month cut the outlook for its sovereign credit rating of Japan, whose debt burden is the biggest in the industrialized world and nearing twice the size of its economy. Moody’s Investors Service Inc. said on Feb. 2 that the U.S.’s Aaa bond rating will come under pressure unless additional measures are taken to reduce deficits.
Nassim Nicholas Taleb, author of “The Black Swan” and a principal at Universal Investments LP in Santa Monica, California, said Feb. 4 that “every single human being” should bet U.S. Treasury bonds will decline, while Pacific Investment Management Co. calls U.K. government bonds “a must to avoid.”
Acknowledging the risks, a document drawn up by Canadian officials for discussion said G-7 members should set “clear, credible and consistent” plans to strengthen their budgets.
Delay in doing so would lead markets to “begin to question our commitment to sound medium-term policy frameworks, with the result that interest rates would rise,” said the report obtained by Bloomberg News. “This would further complicate the challenge of re-normalizing monetary policy and introduce another source of uncertainty.”
The G-7 officials met 195 miles south of the Arctic Circle in a former whaling and fur-trading outpost that is now the capital of Canada’s northernmost territory, Nunavut.
Amid signs that their united push to toughen regulation of global banks is splintering, officials pledged to keep cooperating on forcing financial companies to raise the quality and quantity of capital they hold. That still allows them room to pursue individual policies such as U.S. President Barack Obama’s proposal to limit the size and proprietary risk-taking of large banks, they said.
“While we all want to have as consistent a basis as we can, there will be some specificities that will be relating to each and every country,” Lagarde said.
The ministers moved closer to ensuring banks pay more of the cost of financial turmoil after the recent crisis saddled taxpayers with trillions of dollars in liabilities as governments rescued banks from Citigroup Inc. to Royal Bank of Scotland Group Plc. One proposal winning support is a levy on the banks, a U.K. official said on condition he not be named.
Policy makers will await an International Monetary Fund report in April before making a decision and any plan must be introduced worldwide to be a success, the official said.
“We agreed to work together to make sure financial institutions bear the costs of their contribution to those crises,” Flaherty said.
The G-7 also agreed on the need to cancel Haiti’s debt, including the money it owes multilateral lending institutions, to help the country recover from last month’s earthquake, which killed more than 150,000 people. “Haiti’s tragedy must not be a burden that will weigh on the country’s recovery,” Flaherty said.
The Canadian finance minister said currencies were discussed at the talks and that the group maintained its view that excess volatility in exchange rates can hurt economies and markets. Geithner reiterated the U.S. supports a “strong dollar.”
Major economies with inflexible currencies must consider strengthening them if the global economy is to be weaned off its dependence on U.S. spending and Asian savings, according to a report prepared for the meeting by Flaherty’s department.
Amazing, isn’t it, that they can just wave a wand and make Haiti’s debts disappear? How do you think that’s done? I’ll just let you ponder that one, but while you’re pondering, be sure to ask yourself how Haiti got indebted in the first place and look at how much it got them. Then consider how the process of issuing debt backed money right here at home is holding back the potential of our own economy.