FINANCE MINISTERS from the Group of Seven (G7) countries pledged to press ahead with economic stimulus measures at a meeting in Canada at the weekend, despite an intensified focus by investors on the mounting budget deficits in euro-zone countries.
Analysts at Deutsche Bank AG have warned that increases in the cost of insuring against debt defaults in Greece, Spain and Portugal may be a “dress rehearsal” for the US and UK, whose own budgets have deteriorated during the financial crisis and recession.
The G7 officials, who oversee about half of the world economy, are betting that spending now will generate enough economic growth to help erode their fiscal imbalances and make it easier for them to pull back later.
“The position for most countries is to support the economies now and get the budget deficit down as the economy recovers,” Britain’s chancellor of the exchequer Alistair Darling said.
With the International Monetary Fund (IMF) calculating debt in the Group of 20 economies will reach 118 per cent of GDP in 2014, up from about 80 per cent before the crisis, some G7 nations are attracting the ire of investors and credit rating companies.
Standard Poor’s last month cut the outlook for its sovereign credit rating of Japan, whose debt burden is the biggest in the industrialised world and nearing twice the size of its economy, while Moody’s said last week that the US’s AAA bond rating will come under pressure unless additional measures are taken to reduce deficits.
However, US treasury secretary Timothy Geithner said yesterday that the US was in no danger of losing its AAA debt rating, even though the Obama administration has predicted a $1.6 trillion budget deficit in 2010.
“Absolutely not,” Mr Geithner said, when asked in an ABC News interview whether a downgrade is a concern. “That will never happen to this country.”
Mr Geithner said investors turn to US treasury securities and dollar-denominated assets whenever they are worried about global stability. That reflects “basic confidence” in the US and its ability to bounce back from the global recession, he said.
Speaking after a meeting of finance ministers and central bankers from the G7 in Iqaluit, Canada yesterday, Canadian finance minister Jim Flaherty said the countries would “continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track”.
Greece is struggling to persuade financial markets it can restrain the EU’s largest budget shortfall without outside assistance, while borrowing costs are also rising for Portugal and Spain.
European finance ministers said they will help ensure Greece tackles its deficit and European Central Bank president Jean-Claude Trichet said the bank is “confident” the country will cut its gap below the EU’s limit of 3 per cent of gross domestic product in 2012 from 12.7 per cent.
“The message was clearly that the European members of the Group of Seven have confirmed the substance and significance of the plan put together by Greece,” French finance minister Christine Lagarde said.
“The European members of the G7 will make sure it is managed.”
Acknowledging the risks, a document drawn up by Canadian officials for discussion said G7 members should set “clear, credible and consistent” plans to strengthen their budgets. Delay in doing so would lead markets to “begin to question our commitment to sound medium-term policy frameworks, with the result that interest rates would rise,” said the report. – (Bloomberg / Reuters)
