G-20 Responds to European Debt Crisis With Deficit-Cutting Goal

Group of 20 leaders responded to the European debt crisis with deficit-reduction targets and agreed to pursue higher capital requirements for banks once economic recoveries take hold.

Advanced G-20 economies will aim to halve deficits by 2013 and start to stabilize their debt-to-output ratios by 2016, the group said in a statement yesterday after a meeting in Toronto. Leaders said nations can move at their own pace and also pledged to fulfill existing stimulus plans.

While President Barack Obama is pushing his counterparts to focus on spurring growth, leaders in the U.K. and Germany are already tightening spending to bolster investor confidence. U.S. and European stocks both had their biggest weekly drops in more than a month last week as investors renewed concerns that countries may be unable to repay debts.

“The view of the business community is that we need fiscal restraint in order to ensure confidence and therefore sustainable economic growth,” Gordon Nixon, chief executive officer of Toronto-based Royal Bank of Canada, the country’s biggest bank, said in a telephone interview. “These targets are very important.”

Canadian Prime Minister Stephen Harper said his country could meet the targets, which as chairman of the meeting he had proposed earlier this month, as soon as next year. The agreement still amounted to a compromise that lacks strength, said Stephen Roach, Morgan Stanley’s Asia chairman.

Photographer: Norm Betts/Bloomberg

Canada's prime minister Stephen Harper speaks at a news conference during the Group of 20 summit in Toronto. Close

Canada's prime minister Stephen Harper speaks at a news conference during the Group of... Read More

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Photographer: Norm Betts/Bloomberg

Canada's prime minister Stephen Harper speaks at a news conference during the Group of 20 summit in Toronto.

‘Underwhelmed’

“I am underwhelmed,” said Roach in an e-mail. “By attempting to finesse the trade-off between America’s call for ongoing stimulus and Europe’s penchant for fiscal consolidation the G-20 has come up with a multi-purpose recipe with no enforcement mechanism.”

U.S. Treasury two-year yields were near the lowest level this year after the G-20’s pledge to cut deficits. The two year note yielded 0.66 percent as of 7:35 a.m. in London, according to data compiled by Bloomberg.

The U.K.’s announcement last week about its planned budget cuts spurred an increase in gilts and the pound, and led Fitch Ratings Ltd. to say Britain would keep its AAA credit rating.

“With respect to deficits, markets are giving Europe direction, and markets are more powerful than words from President Obama,” said Tony Fratto, who served as a White House and U.S. Treasury official under President George W. Bush.

‘Unacceptable Levels’

G-20 leaders called the global recovery “uneven and fragile,” noting that unemployment remains at “unacceptable levels” in many nations. In the U.S., economists surveyed by Bloomberg News expect the Labor Department to report that in June employment fell for the first time this year.

Concerns about the global recovery have added to stress in the credit markets. Company debt offerings declined 3.8 percent last week to $38.6 billion, according to data compiled by Bloomberg. Renault SA, France’s second-biggest carmaker, reduced a bond sale by 20 percent, citing “more difficult” market conditions.

“To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand,” the G-20 statement said. “At the same time, recent events highlight the importance of sustainable public finances.”

The balance struck by the G-20 means “everyone can sell it at home as a victory,” said Carsten Brzeski, an economist at ING Group in Brussels. “The announcement to halve fiscal deficits by 2013 is huge.”

‘Draconian’

The leaders addressed resistance to the deficit-reduction goals by limiting them to advanced economies. Brazil’s Finance Minister Guido Mantega on June 26 said the targets were “draconian.” Mantega represented Brazil at the meeting because President Luiz Inacio Lula da Silva stayed home after floods ravaged the northeastern part of his country.

The phrasing meant “we are going to treat President Lula of Brazil with respect,” said John Kirton, director of the G-8 Research Group and co-director of the G-20 Research Group at the University of Toronto. “It’s the advanced industrial economies that have the problems, so the G-20 agrees that those with the problem have got to do the solution.”

“It’s a powerful statement,” said Craig Alexander, chief economist of Toronto-Dominion Bank, Canada’s second-largest bank by assets. “The emphasis now is on fiscal restraint.”

Bank Tax

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.

The G-20 leaders said banks need to have “significantly higher” capital, while giving lenders more flexibility to implement the changes. Countries should adopt the new standards by the end of 2012, and banks will be allowed to phase in capital increases during a transition period.

Leaders said they will seek final agreement at a summit in Seoul in November when the Basel Committee of Banking and Supervision, made up of international central bankers, will propose a road map. The U.S. pushed for stricter new capital rules while Europeans stressed the need for a phase-in period.

The group didn’t support the implementation of a bank tax, whose backers include the U.K.

“Some countries are pursuing a financial levy,” the G-20 said. “Other countries are pursuing different approaches.”

Banking Industry

Royal Bank of Canada’s Nixon called the statement “quite positive,” saying, “I don’t think there’s any surprises to the banking industry.”

The group agreed to refrain from increasing or imposing new barriers on trade until the end of 2013 and reiterated support for the Doha round of World Trade Organization talks. Even so, both the G-20 and the G-8 stopped short of calling for completion of the Doha trade accord by a certain date, and the G-8 emphasized the need for regional and bilateral agreements.

G-8 leaders also sounded warnings on international political issues. G-8 officials singled out Iran for a “continued lack of transparency regarding its nuclear activities” and said they “deplore” the March 26 attack on the South Korean warship Cheonan. An international panel blamed the attack on North Korea.

Neither the G-8 nor the G-20 mentioned China’s currency, though the G-20 did call for “greater exchange rate flexibility in some emerging markets.” China indicated on June 19 that it was scrapping the yuan’s two-year-old peg to the dollar and reiterated the aim at a media briefing on June 26.

Security Fence

“Our Chinese friends don’t like to be singled out within a communique,” French President Nicolas Sarkozy told reporters.

Outside the security fence that surrounded the meeting, protests turned violent for both days of the summit. Protesters set fire to cars, smashed store windows and threw rocks at First Canadian Place, headquarters of the Bank of Montreal. Police have detained more than 500 people since June 18, said Tim Garland, a spokesman with the Integrated Security Unit, a coalition of police forces providing security for the summit.

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

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