Sept. 24 (Bloomberg) -- Global leaders may be saddled with the weakest recovery since World War II if they are to pay off the $9 trillion tab they ran up rescuing the world economy from the deepest financial slump in seven decades.

U.S. President Barack Obama and his counterparts from the Group of 20 nations meet in Pittsburgh today warning that the recovery is still too weak to start reversing lifelines to banks and the broader economy. Their next challenge will be to reduce the resulting debt before it sparks higher bond yields and erodes their governments’ creditworthiness.

“There’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt,” said Harvard University Professor Kenneth Rogoff who is a co-author of a new history on financial crises. “It’s very likely that will trigger the next crisis as governments have been stretched so wide.”

Unwinding the borrowing will probably require leaders to raise taxes and cut spending, ushering in what HSBC Holdings Plc Chief Economist Stephen King calls an “age of austerity” that saps growth prospects for years to come even amid recovery.

The Organization for Economic Cooperation and Development predicts the world economy’s potential growth rate will fall to 1.1 percent next year, compared with 2.4 percent in the decade before the crisis. The International Monetary Fund says G-20 debt will reach 82.1 percent of gross domestic product in 2010, almost 20 percentage points more than two years ago and the equivalent of about $37 trillion.

‘Fiscal Mess’

“Economies have stabilized and now governments have to think more clearly about the fiscal mess,” said HSBC’s King, a former U.K. Treasury official.

Former Federal Reserve Chairman Alan Greenspan said Sept. 16 that U.S. debt, already about 84 percent of GDP, is “very dangerous” and threatens both Treasuries and the dollar.

Greenspan said that if there was a significant issuance of Treasury securities that increased the debt, “there would be of necessity downward pressure on the dollar.”

“We’ve got to confront that issue immediately,” he said.

The G-20 meeting will start at 6 p.m., when Obama hosts a dinner for the leaders, and concludes at about 4 p.m. tomorrow with a statement and press conferences. On the agenda for the leaders’ third talks in a year: bankers’ pay, setting rules for banking capital and devising coherent exit strategies from stimulus packages totaling more than $2 trillion.

Voter Anxiety

Voters are starting to signal discomfort with the global round of fiscal excess, adding to pressure on politicians. The budget deficit was listed as the third most-important issue facing the U.S. after the economy and health-care in a Bloomberg News poll this month and a majority of those surveyed criticized Obama’s handling of it.

In the U.K., Brown’s Labour Party received the support of just 26 percent of those polled by ICM this month, while backing for German Chancellor Angela Merkel’s Christian Democrats slid further in two surveys released yesterday before Sept. 27 elections.

Central bankers are sounding the alarm too in a sign they worry interest rates will have to be raised higher than they otherwise would be if governments don’t cut budgets.

“Everyone is concerned that we get back to a position where the public finances are clearly on a sound footing,” Bank of England Governor Mervyn King said Sept. 15.

Sovereign Debt

For now, bond investors are showing little concern about the debt as they focus on weak growth and indications from central banks that they’re not ready to start increasing interest rates. The Merrill Lynch & Co. Global Sovereign Broad Market Plus Index shows government debt yields this month reached the lowest since April.

AAA-rated countries, including the U.S., Britain, France and Germany, must articulate “credible exit strategies relatively soon” to shore up investors’ confidence, David Riley, head of global sovereign ratings at Fitch Ratings in London, said in a report today.

Leaders say they are starting to plot how to withdraw the stimulus. Facing the biggest budget deficit in the G-20 at about 12 percent of GDP, Brown last week promised to make “hard choices” to cut U.K. costs. Goldman Sachs Group Inc. estimates U.S. fiscal policy will tighten by at least 1.6 percent of GDP in 2011. Germany today cut its program of debt sales as the end of the recession helped boost its coffers.

The policy makers “need especially to speak about the U.S. deficit and the enormous amount of foreign capital that’s flowed into the U.S. to cover this deficit,” German Finance Minister Peer Steinbrueck told reporters in Berlin today before flying to Pittsburgh with Merkel.

Damping Growth

The crisis has permanently scarred the G-20’s economies by reducing their potential to grow, says James Nixon, co-chief European economist at Societe Generale SA in London. He estimates that the U.K. will have to raise taxes or cut spending to the tune of 9.1 percent of GDP to balance its books.

“This will depress growth for years to come,” said Nixon, a former economist at the European Central Bank.

Weaker long-term growth could compound the impact of a jump in interest rates should investor concern about deficits return. The Basel, Switzerland-based Bank for International Settlements said Sept. 13 that long-term bond yields will likely rise as investors refocus on the widening budget deficits.

“We could be in a pickle,” Nobel laureate Joseph Stiglitz, a professor at Columbia University in New York, said in an interview. “If long-term interest rates go up, that could be a damper.”

To contact the reporters on this story: Simon Kennedy in Pittsburgh at skennedy4@bloomberg.net

Last Updated: September 24, 2009 12:54 EDT