G20 faces balancing act to safeguard recovery

BUSAN, South Korea (AFP) – Finance ministers from the world's biggest economies were urged to balance efforts to shore up a fragile global recovery with the need to slash deficits when a G20 meeting begins Friday.

With the sovereign-debt crisis in Europe forcing countries there to accelerate debt-reduction measures, fears are growing that moves towards tough austerity could hit growth and derail a recovery whose durability is at risk.

(L-R) IMF Managing Director Dominique Strauss-Kahn chats with US Treasury Secretary Tim Geithner and France's Finance Minister Christine Lagarde following their meeting at IMF Headquarters in Washington, DC in April 2010. AFP file

Officials said the meeting was also unlikely to reach a conclusion on the contentious issue of tighter banking regulation as viewpoints diverge.

"It's important that we understand just how fragile the recovery is," said Trevor Manuel, minister in the presidency for South Africa and former finance minister.

"Economies around the world are raising the spectre of a double-dip recession and this presents the opportunity to take decisions to prevent the world from going into a fresh recession."

Officials are wary of shifting too quickly towards emphasising deficit cuts at the cost of growth despite the threat of bond markets hammering debt-hit governments, as witnessed recently with Greece's soaring borrowing costs.

"We shall have to achieve economic recovery, at the same time we cannot give up fiscal prudence," India's Finance Minister Pranab Mukherjee told AFP.

"So striking a balance between two apparently contradictory situations is to be achieved. That is the challenge."

Europe's debt crisis will dominate the talks. But ministers are unlikely to single out either the euro or the yuan -- which China is under pressure to let appreciate -- for specific discussions in Busan, a G20 official said Friday.

"This issue may come up but I don't think, as separate individual actions, it will be on agenda items," said Sakong Il, chairman of Seoul's presidential committee for the G20 summit.

As ministers start two days of meetings in Busan, there were also indications that they would struggle to carve out a consensus on how to impose tougher restrictions on the banking sector.

"Further deliberation of this issue" was needed, said Sakong.

The International Monetary Fund is expected to present a revised draft proposal on a bank levy at the meeting, an IMF spokeswoman said Friday.

A final proposal will go to a G20 meeting in Toronto later this month for review, but US officials say it is unlikely that the summit will reach an agreement on a unified approach.

A global banking tax is supported by European powers and the United States but resisted by some developing nations plus Canada and Australia, who argue that they should not have to pay to clear up a mess they did not create.

"Our banking system could withstand the trouble which counterparts in Europe and America had to face, mainly because of well-placed regulations," said Mukherjee.

"Well-placed regulations can achieve the job... we are not in favour of taxing the banks."

Economies such as the US that are largely financed by markets want banks to be required to hold more assets on their balance sheets to protect against any future crises.

But policymakers in continental Europe, where banks provide more financing, worry that higher reserve requirements may hit growth.

Stricter capital rules being devised by Basel regulators are supposed to be ready by the end of 2010 and the G20 says it aims to implement them by the end of 2012 if the global economy has emerged from the downturn.

Sakong also said the group must work to narrow the development gap between rich and poor nations to ensure sustained growth in efforts to rebalance the global economy.

"It is just not possible for the world to achieve sustainable and balanced growth as long as there's a persistent gap in development," he said.

The meeting Friday and Saturday will prepare for a G20 summit in Toronto on June 26-27 of the top developed and developing nations.

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