Finance chiefs singled out the U.S.’s fiscal fight as the most pressing threat to the global economy as they urged lawmakers to find a resolution quickly and avoid a destabilizing default of the world’s benchmark debt.
With President Barack Obama and Republican lawmakers trying to end an impasse that has partially closed the government since the beginning of the month, Group of 20 central bankers and finance ministers yesterday urged “urgent action” to end the deadlock. The concern, expressed by officials from China to Europe at talks in Washington, is that the lack of a deal would shake markets and risk provoking a worldwide recession.
“A failure to resolve the situation in the U.S. would have global consequences,” Canadian Finance Minister Jim Flaherty said. Chinese Deputy Finance Minister Zhu Guangyao, whose nation is the biggest overseas holder of Treasuries, said “we hope the U.S. heeds the global concerns.”
A month after the U.S. Federal Reserve surprised investors by deciding not to slow its asset-purchase program, the G-20 officials from the world’s leading emerging and developed economies also pledged future changes to monetary policy would be “carefully calibrated and clearly communicated.”
The week ended with optimism U.S. officials would find a compromise to extend the nation’s $16.7 trillion borrowing authority before an Oct. 17 deadline. The Standard & Poor’s 500 Index yesterday reached its highest level since September, rising 0.6 percent to 1,703.20.
U.S. Treasury Secretary Jacob J. Lew used the visit of his international counterparts to highlight the risks of inaction by warning the U.S. cannot take for granted its role as “the anchor of the international financial system.”
Calls for U.S. action represented a rare G-20 rebuke of the world’s largest economy, which typically uses such occasions to lecture other nations on their policies, be it China on the value of the yuan or Europe on its need to tackle fiscal and banking weaknesses.
While the U.S. was pressed at a similar meeting a year ago in Mexico City to avoid a premature fiscal tightening, others including Europe and Japan were also prescribed policies on that occasion. This time, the U.S. was alone in being named in the statement.
The Washington dispute cast a shadow over a meeting at which officials welcomed signs that advanced economies are finally showing “early signs of improvement,” even as many emerging markets slow. That marks a reversal of the trends that have shaped the world economy since it escaped its 2009 recession.
“No one needs the uncertainty to be dragged out because it has a negative effect on all of our countries,” Russian Finance Minister Anton Siluanov told reporters after running the G-20 meeting. “Various scenarios were certainly discussed in terms of how things could develop, but on the whole, optimism was at the forefront.”
A secondary theme throughout the G-20 talks was the outlook for monetary policy, with emerging markets saying that reducing stimulus in rich nations could harm them by encouraging an exit of capital and higher borrowing costs. The group promised to monitor “spillovers” in which actions taken by one economy hurt another.
Emerging market bonds and currencies fell earlier this year as Fed officials signaled they may soon start to taper their $85 billion asset-purchase program. The U.S. central bank then surprised investors last month by leaving the rate of purchases unchanged.
“There were some opinions from emerging-market economies that speculation of reduced monetary stimulus from the developed countries could lead to volatility in financial markets and capital flows,” Bank of Japan Governor Haruhiko Kuroda said.
While acknowledging the need to be wary of them, the U.K. Chancellor of the Exchequer George Osborne said “spillovers should not be an excuse for emerging economies not doing what many of them need to do” to improve their economies.
Adopting a minority view within the G-20, Flaherty urged Fed officials to end their quantitative easing as “quickly as they can.”