G8 nations to ask for study on ending stimulus

The world’s rich nations are expected on Saturday to commission a study on how to unwind policies to rescue their economies, though officials are still cautious about the speed of a recovery.

The Group of Eight finance ministers, meeting in southern Italy, will ask the International Monetary Fund to conduct the study in a communiqué to be released later on Saturday, a G8 source told Reuters.

The move would not mean any quick tightening of budget and interest rate policies, which have been eased drastically over the past year to fight the global credit crisis.

But it does suggest G8 nations feel the start of an economic recovery is in sight, and want to reassure financial markets that they can manage the recovery without unleashing a wave of inflation.

”I will support the request to the IMF to work out options for exit-strategies,” German Finance Minister Peer Steinbrueck told a briefing as ministers headed into meetings on Saturday.

”There are indeed indicators which show that there will be possibly a certain stabilisation [of the economy]. But I share the view of the IMF completely that the date and the drive of the upswing and the sustainability of it are very insecure.”

A leap in long-term government bond yields over the past several weeks shows markets fear the huge sums of public money pumped into economies will eventually fuel inflation and damage governments’ finances for years to come.

Pressure has therefore been building in the G8 for talks on ways to wind down stimulus as soon as it is no longer needed — ”exit strategies” that would prevent market interest rates from rising high enough to threaten economic recovery.

”The IMF report will probably be presented at the [IMF’s] October annual meeting in Istanbul,” the G8 source, declining to be named, said late on Friday.

The IMF study could provide governments with some political cover when they eventually start making painful cuts in state spending to bring budget deficits under control, and when central banks begin to raise interest rates back up from near-zero levels.

Political cover
Germany and Canada on Friday urged the G8 to hold its first talks on exit strategies.

But other countries are less enthusiastic about discussing the subject and are less convinced that the worst of the economic slump is over.

Euro zone industrial production shrank by more than a fifth in April, new data showed on Friday, raising risks that the second quarter will be weaker than expected.

”We must not get wrapped up in the pick-up when we’re still in the process of relaunching, stimulating and making sure the stimulus plans are working,” French Economy Minister Christine Lagarde told a briefing late on Friday night.

”We cannot say that at the end of X months we will be at such a threshold and we should withdraw such and such a support.”

”I hope we will find a message that will encourage both keeping up the action of the stimulus plans … [while] we have to start to think about what should be the practice and the policy of the exit strategies.”

Federal Reserve chief Ben Bernanke has said the United States must start planning to restore fiscal balance. But US Treasury Secretary Timothy Geithner has said that although he wants to ”take stock” of recovery efforts, stimulus work is not yet finished.

”The dominant focus of policy everywhere — everywhere — still is on trying to make sure we have a strong foundation for recovery,” he told a news briefing earlier this week.

The G8 groups the United States, Germany, Japan, Britain, France, Italy, Canada and Russia. – Reuters

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