Published April 19, 2013
A – Finance leaders of the G20 economies on Friday were set to debate specific targets for reigning in debt levels and the potential dangers from the latest round of aggressive easing of monetary policy from the world's biggest central banks.
They were also poised to demand swifter resolution to setting guidelines for financial benchmarks like the Libor interest rate in the wake of a global rate-rigging scandal.
But a rethinking of the austerity push among the world's biggest economies loomed as the biggest talking point. Advanced economies, particularly in Europe, have undertaken sharp austerity drives in recent years to curb growing debt, but those efforts have at times damaged economies already suffering from capital flight and under-investment from the private sector.
EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview on Thursday that a period of reduced spending and borrowing was necessary to calm markets concerned about out-of-control debt levels, particularly in peripheral European countries. That time has passed, he said.
"Decisive action was taken. Now as we have restored the credibility in the short-term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium-term," he said.
The United States has opposed committing to any targeted level of public debt as a percentage of GDP, a common way to measure a nation's debt burden.
"I think an issue that will come up ... is the issue of hard targets, or not, for debt-to-GDP," Canadian Finance Minister Jim Flaherty told reporters on Thursday.
In a 2010 study frequently cited by policymakers, Harvard professors Kenneth Rogoff and Carmen Reinhart found that on average, economies contract when the debt-to-GDP ratio surpasses 90 percent - a level G20 officials were set to debate.
However, the study's results were disputed by researchers at the University of Massachusetts at Amherst, who said growth for countries with those ratios was actually 2.2 percent.
Weakness in economies that undertook the most severe measures to cut deficits undercut the austerity argument. The United Kingdom, in particular, is suffering its third recession in the last five years.
Still, Flaherty urged the G20 to set hard targets on debt and deficit, though he added that troubled economies should move more slowly towards balanced budgets than others.
"It's important for confidence by investors, which leads to more investment, economic growth and jobs," Flaherty said.
The unprecedented level of monetary stimulus designed to reinvigorate struggling large economies, including the United States, the euro zone and Japan, has raised concerns about excessive capital flight to developing nations.
In a communique on Thursday, the Group of 24 developing nations, whose ranks include Brazil, India, South Africa and Mexico, called on the advanced economies to "take into account the negative spillover effects ... of prolonged unconventional monetary policies including on inflation and the volatility of capital flows and commodity prices."
The Bank of Japan is attempting to end decades of stagnation by pumping $1.4 trillion into its economy, some of which is expected to find its way into emerging markets. Local currency funds have pulled in $16.7 billion in the first quarter of 2013 worldwide, the most in more than two years, according to Lipper, a unit of Thomson Reuters.
"There is a call from the G24 members to have clear coordination and better communication between advanced economies and emerging markets ... towards using coordination as a way to mitigate these potential asset appreciation bubbles. The consensus is that this is something that has to be closely monitored," said Mexican Finance Minister Luis Videgaray.
Videgaray has cause for concern.
In the days following the Bank of Japan's announcement, for example, the Mexican peso jumped 2.5 percent against the dollar to its strongest in 20 months. Against the yen, the peso surged over 9 percent.
Bank of Japan Governor Haruhiko Kuroda, in response to questioning about the country's aggressive efforts, said he didn't see signs of asset price bubbles "brewing in emerging nations" as a result of monetary stimulus.
"It's true that the massive monetary stimulus of advanced economies may affect emerging economies including through capital inflows," he said. "Such spill-over effects had been discussed even before the G20 meeting, and will likely be on the agenda at (this week's) meeting too."
The G20 finance ministers are due to release their formal communique around midday on Friday. They plan to task the Financial Stability Board, a coordinating body of global financial regulators, with overseeing the reform of financial benchmarks such as Libor, two sources familiar with the situation told Reuters on Thursday.
An early draft of a communique G20 financial officials will be debating asks the FSB to take on the role after a global interest rate-rigging scandal that involved some of the world's largest banks.
The International Organization of Securities Commissions came out with a report this week saying that financial benchmarks should be based on actual transactions rather than estimates, such as is the case with Libor.