G20 to pledge stimulus until economic recovery certain

The Group of 20 will promise this weekend to keep economic support packages in place until recovery is certain and seek to reassure financial markets they have credible plans to withdraw the stimulus when appropriate.

Finance ministers and central bankers from the G20 developed and emerging nations are meeting in London to discuss the economic outlook, curbs on bank bonuses, tighter financial regulation and reform of international institutions.

Since their leaders met in April in the midst of the worst global recession since the Great Depression, prospects for the world economy have improved with growth returning in a number of countries and stock markets powering ahead.

But policymakers are cautious about declaring victory yet.

“Unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and unemployment,” said International Monetary Fund (IMF) chief Dominique Strauss-Kahn at a conference in Berlin on Friday.

Group of Seven sources have told Reuters that the G20’s communique, due on Saturday, will likely maintain the pledge to keep policy accommodative for as long as was needed.

“The biggest risk is to think that the job’s done — that recovery is guaranteed. No country can be complacent — we’ve got to see this through,” British Finance Minister and meeting host Alistair Darling said late on Thursday.

Still, with interest rates at record lows and trillions of dollars thrown into their economies to fight the crisis, policymakers are also keen to show they have exit strategies in place lest financial markets take fright that inflation will rocket and public finances fall apart.

“Now is not the time to exit. But I would like to make it clear that the ECB has a strategy, and we stand ready to put it into action when the appropriate time comes,” said European Central Bank President Jean-Claude Trichet said in Frankfurt.

Bonus curbs
With unemployment still likely to rise for a while and eat into incumbent government poll ratings, the politicians are also looking for someone to blame and will stress that banks cannot return to business as normal.

France, Germany and Britain on Thursday put forward joint proposals to change the bonus culture at banks that many say was the root of the current crisis. These include deferrals and subjecting payments to clawback but fall short of the tax being advocated by some charities.

Ministers who are laying the groundwork for a leaders’ summit in Pittsburgh later this month will also look at enhanced regulation of systemically important banks and ways in which these institutions can be wound up if needed without shaking the financial system.

United States Treasury Secretary Timothy Geithner is pressing the G20 to back tough new international standards for bank capital and liquidity. The US Treasury said on Thursday a comprehensive agreement should be reached by the end of 2010, with countries implementing the standards by the end of 2012.

Other issues on the table are ensuring the IMF gets the full resources promised to it at April’s London summit when leaders pledged a mammoth $1,1-trillion increase in the lender’s firepower.

Dinner on Friday will discuss how the IMF and the World Bank can be reformed to reflect better the emergence of the new economic powers.

Representatives from Brazil, Russia, India and China will meet on the sidelines of the meeting and Geithner is expected to join them.

US President Barack Obama’s administration also wants to make climate change a big issue for the Pittsburgh summit and will call on fellow G20 members to eliminate fossil fuel subsidies and increase oil market transparency. — Retuers

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