G-20 Leaders Agree to Tackle Deficits Once Economic Recoveries Are Assured

Group of 20 leaders endorsed targets to cut deficits and agreed to pursue higher capital requirements for banks once their economic recoveries take root.

Advanced economies will aim to at least halve deficits by 2013 and stabilize their debt-to-output ratios by 2016, according to a statement released as leaders finished meeting in Toronto today. The G-20 said banks need to raise capital “significantly” and countries will be allowed to phase in new rules, with a goal of meeting new standards by the end of 2012.

“Honestly, this is more than I expected, because it is quite specific,” German Chancellor Angela Merkel said, referring to the fiscal targets. “It’s a success that industrialized countries as a group accepted this.”

The G-20 also pledged to maintain existing stimulus plans and take “concerted actions” to sustain the recovery. Recent events highlight the need to establish “properly phased” plans to rein in deficits. Emerging market economies pledged to take measures to strengthen social safety nets, raise infrastructure spending and enhance exchange rate flexibility.

The statement includes targets championed by Canadian Prime Minister Stephen Harper, who sought to narrow differences between the U.S. and Europe by proposing minimum deficit and debt reduction goals.

Bridge the Gap

The G-20 had to bridge a gap between leaders such as President Barack Obama who want to focus on growth and officials such as Merkel who favor budget cuts. The statement says the global recovery, which has been faster than expected, remains “uneven and fragile.”

Efforts to lower deficits and sustain the recovery will be differentiated and tailored to national circumstances, according to the statement.

“Here is the tightrope we must walk,” Harper told the G- 20 leaders in his opening remarks today. “To sustain the recovery, it is imperative that we follow through on existing stimulus plans. At the same time, advanced countries must send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order.”

Countries such as Brazil had opposed the specific deficit targets, saying it will be hard for some G-20 members to meet them without stifling economic growth.

Draconian, Difficult

“It is draconian, a little difficult, a little exaggerated,” said Brazilian Finance Minister Guido Mantega. “Some countries would not be able to do it. It is clear that a cut is needed, but at what velocity? It can’t be too fast.”

The agreement effectively endorsed the austerity plan set out by the U.K., while acknowledging U.S. concerns that countries shouldn’t be required to start cutting public spending until their own recoveries are fully entrenched.

“There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery,” the statement said.

The G-20, which accounts for about 85 percent of the global economy, replaced the G-8 last year as the world’s foremost international policy-coordinating forum. The larger group means developed and emerging economies are trying to find common ground amid differences in prosperity that vary from the U.S.’s $46,400 in GDP per capita to India’s $3,100.

Same Direction

European nations have led the charge on the deficits. Merkel said in an interview with ZDF television that she lobbied her counterparts at the G-8 meeting to pursue “solid” fiscal policies and defended her own plan to reduce Germany’s budget deficit by about 10 billion euros ($12.4 billion) per year.

U.S. Treasuries are having their best year since 1995, returning 5 percent through June 24, according to Bank of America Merrill Lynch index data, as investors seek alternatives to Europe, where Greece and Spain had their credit ratings downgraded.

“European countries just had a near-death experience over Greece,” said Tony Fratto, a former Treasury and White House official under former President George W. Bush. “Some are afraid of suffering the same fate.”

The G-20 said banks need to raise capital “significantly” to avoid a repeat of the global financial crisis. Banks will be allowed to phase in capital increases, with a goal of meeting new standards by the end of 2012, according to the statement.

The G-20 statement also calls for “a single set of high quality” accounting standards and executive pay rules. The leaders agreed on the need to improve oversight of hedge funds, credit rating companies and over-the-counter derivatives “in an internationally consistent and non-discriminatory way.”

On the issue of trade, the G-20 leaders said they would renew their commitment to avoid increasing or raising new barriers to trade until the end of 2013.

Outside the fence that surrounds the meeting, protests turned violent for a second day. Yesterday, protesters set fire to cars; others threw rocks at the windows of First Canadian Place, headquarters of the Bank of Montreal, and spray-painted “Bomb the banks” on the building.

Toronto police have made 224 arrests today, said Tim Garland, a spokesman with the Integrated Security Unit.

To contact the reporters on this story: Kristin Jensen in Toronto at kjensen@bloomberg.net Theophilos Argitis in Toronto at targitis@bloomberg.net

German Chancellor Angela Merkel lobbied her counterparts at a G-8 meeting to pursue "solid" fiscal policies. Photographer: Andrew Harrer/Bloomberg

June 28 (Bloomberg) -- Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, talks with Bloomberg's Susan Li about the Group of 20 leaders' plan to cut deficits and pursue higher capital requirements for banks once their economic recoveries take root. Kirkegaard, speaking from Washington, also discusses the shift in China's currency policy. (Source: Bloomberg)