World leaders will commit to keep spending to prop up their economies at a G20 summit next week, Russia said on Thursday, while France appeared to tone down its rhetoric on the issue of bank bonus caps. The Kremlin's economic adviser said leaders from the world's 20 largest economies agreed now was not the time to withdraw the trillions of taxpayers dollars deployed to counter recession, and would say so at the G20 summit Pittsburgh on September 24-25.
"I think the leaders will confirm, as did the finance ministers, that it is premature to drop these measures, but that it is necessary to think about formulating exit strategies," Arkady Dvorkovich told a news conference in Moscow. The Pittsburgh summit, the third since the demise of Lehman Brothers a year ago raised fears of another Great Depression, is set to focus on tougher regulation of the finance sector and what comes next, now that there are tentative signs of recovery.
Russia, which has spent hundreds of billions of dollars on anti-crisis measures, says signs of recovery are too fragile and the economy still needs support. It is also concerned that the recovery could falter if big economies like the United States, the eurozone, China and Japan unilaterally start to wind down stimulus policies.
The crisis began when the US housing and sub-prime credit booms went bust, triggering a crisis in global financial markets in 2007 that gradually tipped the wider economy into recession. Trade unions have urged the G20 leaders do more to help the 59 million people they say will lose their jobs in the crisis and are also demanding leaders deliver in Pittsburgh on promises to get tough with banks. In newspaper comments, French Economy Minister Christine Lagarde said Paris would not demand a specific number, saying that she wanted simply something that laid out clear limits.
"We're not so narrow-minded to the point that we want a number," she said in an interview in the Wall Street Journal. "But we want something that can be nailed down to solid parameters ... something that effectively limits and frames compensation." French President Nicolas Sarkozy has led calls for a G20 decision to cap bonus payments, putting himself and other leaders under pressure to deliver a voter-friendly result, and earlier giving three broad ideas for how this could be delivered.
A meeting of finance ministers earlier this month tasked the so-called Financial Stability Board (FSB) with examining the issue. FSB chief Mario Draghi said this week the idea being worked on was to have total "bonus pools" linked to performance of banks, suggesting how banks doled out that money to traders, executive and other staff, would remain their prerogative.
Jean-Claude Juncker, the man who chairs meetings of finance ministers from the 16 euro currency countries, told Deutschlandfunk radio that Europe should go it alone if Washington refused to go far enough on bank bonuses. "Over time this would gain so much momentum that the Americans wouldn't be able to close themselves off to a unified, international co-ordinated process," Juncker said. Regulators and central bankers are beavering away at a host of other slowburning reforms to make financial markets safer and root out excessive risk-taking by banks.
One key forum of regulators, the Basel Committee on Banking Supervision, said one priority was to have credible plans to unwind troubled banks and limit spillover to the rest of the banking sector at such moments. "The recommendations seek to promote more orderly resolution of cross-border banks to reduce systemic risk and help address the too-big-to-fail problem," Nout Wellink, head of the Basel Committee, said.
Beyond bonuses and other financial reforms, investors are watching for any sign central bankers and governments are able and willing to raise rock-bottom interest rates or end massive government spending programmes launched after Lehman's demise. The finance ministers last week said stimulus should only be withdrawn when there were more convincing signs of a sustainable rebound.
The Russian comments on Thursday, after similar signs from the EU, showed that position remained valid even if there are signs that the storm has passed. Public forecasters such as the OECD and IMF have said in recent days there are tentative signs of a pickup in demand and a stabilisation in cross-border trade after the nosedives of late 2008-early 2009, but that recovery could be sluggish.
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