G8 seeks exit from stimulus packages
June 15, 2009 Edition 1
Anna Willard and David Lawder Lecce, Italy
rich nations, heartened by signs the credit crisis was easing, had started to consider how to unwind rescue steps for their economies once recovery was certain, their finance ministers said on Saturday.
Meeting in southern Italy, the ministers of the Group of Eight (G8) described their economies in the most positive terms since Lehman Brothers' collapse nine months ago, which ushered in the financial crisis and the ensuing economic recession.
"The force of the economic storm is receding," US Treasury Secretary Timothy Geithner said as G8 finance ministers ended their two-day talks.
A surge in long-term government bond yields in the past several weeks shows financial markets fear that huge sums of money poured into economies through drastic stimulus will ultimately fuel inflation and cripple state finances.
But ministers clearly differed over how quickly the world should start rolling back huge state spending plans and begin hiking interest rates.
And there was continued disagreement over other aspects of the crisis, especially testing the health of banks.
The ministers said they had asked the International Monetary Fund (IMF) to help them analyse possible ways of ending economic stimulus policies.
A G8 source, who declined to be named, said that the IMF report would probably be presented at the fund's October annual meeting in Istanbul.
Most private sector economists do not expect any major tightening of fiscal and monetary policies in the developed world before next year.
Pressure has been building in the G8, particularly from fiscally conservative nations like Germany and Canada, for plans to wind down stimulus packages as soon as they were no longer needed - "exit strategies" that would prevent market interest rates from climbing high enough to threaten economic recovery.
The communique stressed there would be no immediate end to stimulus packages, noting that unemployment might continue rising even if production began picking up.
"While the economic outlook is improving, the situation remains uncertain," the communique noted.
Geithner indicated that the US was unlikely to tighten its policy any time soon: "It is too early to shift toward policy restraint," he said.
Underlining the precariousness of any economic recovery, data released as the meeting began on Friday showed (that) industrial production in the euro zone plunged by more than a fifth in April, a bigger fall than markets had expected.
The debate over stimulus is diplomatically sensitive because if some countries roll back their programmes earlier than other countries, they may be accused of not doing their fair share to ensure a global recovery.
Russian Finance Minister Alexei Kudrin described the meeting as "stormy", featuring heated debate on what stage of the financial crisis the world had reached.
The meeting appeared to make little progress on one tool for restoring confidence to the global financial system: "stress tests" to determine the financial strength of banks.
Canadian Finance Minister Jim Flaherty called on Europe to conduct more such tests and to reveal the results, at least on a system-wide basis.
But Europe's leading powers are divided on publishing results of their tests, which are run by different regulators using different methods, and there was no mention of stress tests in the G8 communique.
French Economy Minister Christine Lagarde said the Europeans would "explain nicely to the Americans" that there would be no quick consensus on stress tests.
Speaking after the meeting, Flaherty said that he had become "much less frustrated" at the Europeans' stance, but added that differences of opinion remained.
"As the economy improves, enthusiasm for international co-operation seems to abate faster than financial market tensions," Marco Annunziata, the chief economist at UniCredit Group, said in a report on the meeting.
The communique identified volatile commodity prices as a major threat to economies; crude oil has jumped about 75 percent since the end of February, even though it remains about 50 percent down from last year's record peak.
Ministers from both France and Italy blamed much of the volatility on speculators, in the same way that they blamed financial speculation last year for worsening the credit crisis.
"Speculation is coming back, a certain type of finance is raising its head again and doing the same not very nice things it was doing until last summer," said Italian Economy Minister Giulio Tremonti.
At the instigation of the Italians, the G8 ministers released a set of principles and standards for the conduct of business globally, calling for more information and protection for investors, tighter regulation, and a stronger sense of commercial ethics.
"The breadth and intensity of the prolonged downturn have revealed the importance of strengthening our commitment to standards of propriety, integrity and transparency," said a summary of the principles, to be called the Lecce Framework.
The G8 grouping is comprised of the US, Germany, Japan, the UK, France, Italy, Canada and Russia. - Reuters
