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The Group of 20 (G20) countries concluded their weekend summit with an outline for reducing budget deficits and a delay in global banking reform, but failed to create a unified policy as nations find themselves in different phases of economic recovery.
Leaders pushed decisions on global banking regulations to the agenda of the November session in Seoul, South Korea. The meeting's concluding statement expressed unity in countries' desires to reduce debt, but did little to alter austerity plans and stimulus measures countries have already created.
"With the common efforts of G20 members and the international community, the world economy is gradually recovering, but the foundations of the recovery are still not solid, the process is not balanced and there are still many uncertainties," said Chinese President Hu Jintao. "All this shows that the deeper impacts of the financial crisis have still not been surmounted, and systemic and structural risks to the world economy remain very grave."
The G20 communique underscored the countries' focus on achieving "growth friendly" fiscal policies while acknowledging that leaders must reduce the budget deficits, although policies and budget cuts should be tailored to suit each individual nation.
"The path of adjustment must be carefully calibrated to sustain the recovery in private demand," the G20 nations wrote. "There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth."
Analysts said the divergent views on how to sustain economic recovery marked the lack of effectiveness of the G20 forum.
"The outcome makes it more difficult to guarantee stability on financial markets if all the countries go their own direction, because you get the possibility of regulatory arbitrage in markets," Michael Heise, chief economist of Europe's biggest insurer Allianz, told Reuters.
U.S. President Barack Obama warned against exiting from stimulus measures while the recovery was still fragile, but European countries like Germany and the United Kingdom defended recent austerity measures. After talks policymakers reached what a U.S. official called a "combo deal" in which the United States agreed to reduce its budget deficit and G20 nations pledged to support economic growth.
Canadian Prime Minister Stephen Harper proposed the advanced economies in the G20 member nations cut their deficits in half by 2013, and countries agreed to set reduction goals based on their respective situations.
The Obama administration's budget for 2011 sets the United States on the path to a deficit of $778 billion in 2013, about half of the $1.6 trillion deficit estimated for 2010. The U.S. government announced Sunday it was aiming to reduce the deficit to 3% of gross domestic product (GDP) by 2015, down from the current 10.1% of GDP.
However, critics question the effectiveness of the deficit reduction plans. The timeline for reducing budget deficits falls inline with what many countries had already planned before the summit, and the G20 members did not outline formal consequences for countries that fail to follow through.
Canada's Harper said countries will have to abide by reduction tactics as the economy guides them to do so.
"They will need to fulfill them because there will be market pressure to fulfill them," said Harper.
U.S. Treasury Secretary Timothy F. Geithner defended the U.S. deficit reduction outline as being more aggressive than European counterparts.
"Look at the announced measured path of deficit reduction for the United States of America over the next three years relative to what the leaders of Germany are considering appropriate for Germany," Geithner said. "And if you look at those together, you'll see ours is much steeper, appropriately so."
The G20 said it was committed to its rebalancing effort announced in September 2009. Countries with trade surpluses, like China, should create policies to reduce exports and increase domestic consumption, while nations with trade deficits, like the United States, should take the opposite course of action. The rebalance would shift consumer dependence away from countries that are trying to regain footing post-recession.
President Obama also warned other countries to boost domestic consumption and not rely on American consumers.
Banking Buys Time Until Stricter Regulation
One thing the financial industry can count on is more stringent rules for banks regarding capital requirements, although institutions would have a multi-year phase-in period to comply with any changes.
The G20 nations are waiting to hear the decisions – referred to as Basel III – made by the Basel Committee on Banking Supervision, due by November's meeting.
The goal of Basel III is to create a banking system that is better prepared to absorb losses during a financial crisis. While leaders want to adopt the rules by 2012, they will allow banks to adjust over time to limit market and recovery disruption.
The current proposals include redefining what banks can consider as Tier 1 capital, and ensuring they have enough liquid assets to protect against a market plunge.
The measures should tie into the industry regulation changes brought on by the U.S. financial reform bill that should be signed by President Obama in July.
"We want to have a level playing field," said Geithner. "In these markets today, risk can move very quickly to evade the strongest standards, and we think they system will be stronger as a whole if these measures in the U.S. we're about to enact are complemented by strong actions in other countries."
Current ratio requirements for core Tier 1 capital for a bank to its risk-weighted assets is 2%. The new rules could see that number double, if not more.
The G20 nations also agreed to let each country decide its own best route for dismantling failed banks. Nations want to avoid having taxpayers foot the bill – like the U.S. bailouts of struggling financial institutions – but leaders are divided on the best tactic.
Some European countries proposed collecting a fee from large banks to use in the case of failure and imposing a global bank tax and a financial transaction tax.
Canada worried that a bank rescue fund would give the financial industry a safety net it doesn't deserve and argued that strict capital and leverage standards should suffice to sustain a healthy banking sector.
"What we've been trying to emphasize in these debates and discussions is the recognition that the banking industry was undercapitalized going into the crisis," Royal Bank of Canada Chief Executive Officer Gordon Nixon told Bloomberg. "There's no question that increased capital requirements are not only coming, they're important, as are leverage limits… but we also have to ensure that it is not to such an extent that it kills economic growth."
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