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Deficits Are Biggest Recovery Risk for Executives, Manley Says

John Manley, who chaired a meeting of global executives that coincided with the Group of 20 leaders summit last month, said there is a consensus among business chiefs worldwide that government deficits are the biggest threat to an economic recovery.

Members of the so-called B-20 who met in Toronto agreed that reducing deficits is “a necessary precondition” for a lasting recovery, Manley, 60, said during a July 9 interview in Bloomberg’s Ottawa office. “There was no dissent” among representatives of companies that included HSBC Holdings Plc, Europe’s biggest lender, and OAO Severstal, Russia’s largest steelmaker.

“You just can’t keep stoking this fire,” Manley said. “Greece has gone ahead of others but others are heading in the same direction, and the sustainability of the deficits at the level they have been is very much in question.”

Curbing deficits became a greater priority after concerns that countries such as Greece and Spain could default on their debts led European policy makers to offer a 750 billion euro ($948 billion) rescue package on May 10. The Markit iTraxx SovX Western Europe Index of default swaps insuring against losses on debt of 15 governments reached an all-time high last month.

The G-20 agreed in Toronto that advanced economies will aim to cut deficits in half by 2013 and stabilize debt-to-output levels by 2016, while the International Monetary Fund urged governments on July 8 to commit to implementing “credible” plans to lower deficits.

‘Restrained Investment’

Government finances may be further strained as interest rates rise from today’s low levels, said Manley, who also leads the Canadian Council of Chief Executives. The council has about 150 members such as Toronto-based Barrick Gold Corp., the world’s biggest gold producer, and BlackBerry maker Research In Motion Ltd., that have C$4.5 trillion ($4.35 trillion) of assets and C$850 billion of annual revenue.

Companies may respond to persistent deficits by creating “a very restrained investment climate,” Manley said. “It’s pretty fresh in their memory that credit just disappeared” during the global crisis, he said.

Manley served as Canada’s Finance Minister in 2002-2003 during Prime Minister Jean Chretien’s Liberal administration, a government which had earlier eliminated a C$38.5 billion deficit. He said Canada’s experience with deficits is “you begin to lose public support when it’s clear that what they pay in taxes doesn’t result in an equivalent level of public service, because the cost of servicing the debt becomes so enormous.”

Manley also served as deputy prime minister, foreign affairs minister and industry minister. He was first elected in 1988 in an Ottawa district and re-elected three times. He has declined opportunities to run for the leadership of the Liberal Party since he quit politics in 2003.

‘Realistic’ Plan

On Canada’s economy, Manley said that Conservative finance minister Jim Flaherty’s plan to narrow Canada’s deficit from a record C$53.8 billion in the year ended March 31 to C$1.8 billion by 2014 is “realistic.” He said provincial governments will struggle more to balance their budgets because of rising health care costs, adding there’s no risk of a default by any Canadian province.

Companies are becoming more optimistic that Canada’s economy is recovering from last year’s recession, Manley said.

“Nobody is going to go on a spending spree or a buying spree right now, but nobody wants to be uncompetitive as the recovery starts to roll in, and there is a higher degree of optimism that’s what is beginning to happen,” he said.

He spoke on the day when government figures showed employment rose 93,200 in June, almost five times more than economists expected.

Stronger Growth

Economists surveyed by the finance department last month increased their growth projections, suggesting that nominal gross domestic product will be higher than projected in the budget over the next five years, with a C$30 billion increase in 2010 and a C$24 billion improvement in 2014. Windfalls from the extra growth should go to deficit reduction before more spending, Manley said.

“My members would say a deficit is still a deficit,” he said. “We don’t have more money, we have less of a deficit, so don’t spend it -- continue to work down the deficit.”

Flaherty should also press ahead with plans to create a national securities regulator over the objections of the Quebec and Alberta provincial governments and Quebec-based companies such as drugstore operator Jean Coutu Group Inc., Manley said.

Flaherty’s ministry released draft legislation on May 26 that would create the national regulator and said his government would submit it to the Supreme Court of Canada to see if it’s constitutional. The draft law would allow provinces to opt out of the system.

The national regulator “is something that has to occur,” Manley said. The government “made it voluntary; how exercised can you get about that? If you don’t want to join, don’t join.”

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