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G-20 finance chiefs concur on curbing deficits

Finance ministers and central bankers from the world's leading economies agreed today on the need to cooperate in fending off financial market turmoil and keeping the world economic recovery on track.

business Updated: Jun 05, 2010 14:56 IST

Finance ministers and central bankers from the world's leading economies agreed today on the need to cooperate in fending off financial market turmoil and keeping the world economic recovery on track.

In a statement that will serve as an outline for talks later this month by national leaders, including President Barack Obama, the Group of 20 endorsed rescue policies for Europe and the need to rebalance growth by supporting more domestic demand and greater trade by developing countries.

The agreement included no major new initiatives, but bridged differences over details of far-reaching financial reforms with calls to step up regulatory changes and cut back on massive budget deficits.

"The recent volatility in financial markets reminds us that significant challenges remain and underscores the importance of international cooperation," the statement said.

Countries must "put in place credible, growth-friendly measures, to deliver fiscal sustainability," it said, noting that the policies would have to fit each country's unique situation. Europe's sovereign debt crisis has sparked worries that the global economy could succumb to a second downturn following the meltdown sparked by the collapse of U.S. investment bank Lehman Brothers in 2008.

"We welcome the determined actions taken by the European Union, the European Central Bank and the IMF," the statement said, referring to a $1 trillion bailout to help countries cope with the fallout from unsustainably high debt levels.
Yoon Jeung-hyun, South Korea's minister of strategy and finance, said concerns over the crisis in Greece and other European countries added urgency to the work on regulatory reforms.

As the ministers hashed out the priorities to forward to their leaders, U.S. Treasury Secretary Timothy Geithner urged his counterparts to reaffirm their commitment to safeguarding the recovery.

"The G-20's strong policy response has played a pivotal role in restoring economic growth but concerns about growth as Europe makes needed policy adjustments threaten to undercut the momentum of the recovery," Geithner said in a letter published online by the Wall Street Journal. Its authenticity was confirmed by his staff.

Hungary warned on Friday that it was the latest European country facing problems following Greece, Spain and Portugal, prompting the euro to fall below $1.20 for the first time in more than four years. European officials insisted that worries about Hungary and the euro were overblown.

"Hungary has made serious progress in consolidating its public finances over the last couple of years," Olli Rehn, Europe's commissioner for economic and monetary affairs, told reporters after the meeting. Any talk of a risk of default "is widely exaggerated," he said.

ECB President Jean-Claude Trichet defended the euro, calling it a "solid currency, a credible currency, a currency that has kept its value in terms of price stability."

The G-20, founded in 1999, shifted its focus to crisis management after the Lehman Brothers collapse. In addition to its annual finance meetings, it has been holding summits since late 2008. A chief concern is how to rein in ballooning fiscal deficits without hobbling growth.

The G-20 is working hard on technical details for reforming financial regulations and participants said there was a basic consensus for the first time on the need for banks and other financial institutions to bear the burden for government bailouts and other interventions.

"The financial sector should make a fair and substantial contribution toward paying for any burdens associated with government interventions," the statement said, noting that such an approach could involve a "range of policy approaches." It said banks should be discouraged from excessive indebtedness and risk taking.

"It is critical that our banking regulators develop capital and liquidity rules of sufficient rigor to allow our financial firms to withstand future downturns in the global financial system," it said.

Details of such initiatives are still being worked out. Some members worry that an increase in the capital reserves banks must hold to cushion themselves against potential loan losses could hinder lending, possibly crimping funding crucial for the recovery.

First Published: Jun 05, 2010 14:46 IST