U.S. fiscal cliff looms large at Mexico G20 meet
World finance chiefs this weekend will press the United States on how it can prevent its fiscal problems from hitting the global economy and will seek reassurance from Europe that it has a grip on its debt crisis.
U.S. and European financial officials are also likely to come under pressure from peers when they meet in Mexico City for dragging their feet on implementing the so-called Basel III accords, the world's response to the 2007-09 financial crisis.
Coming just before the U.S. presidential election and days ahead of China's Communist Party congress, several top finance ministers and central bankers are skipping their twice yearly scheduled meeting with their peers from the Group of 20, which comprises the leading developed and developing economies.
One G20 official described the timing as the "worst date possible" and people involved in the talks said no major agreements were expected.
U.S. Treasury Secretary Timothy Geithner - who is expected to stand down soon after the U.S. elections on Tuesday - European Central Bank chief Mario Draghi and French Finance Minister Pierre Moscovici will all be absent, while sources said Brazilian Finance Minister Guido Mantega would skip and that top Chinese officials were unlikely to attend.
"Every member country is worried about the U.S. fiscal cliff," one G20 source said on condition of anonymity. "What we will do is add more pressure on U.S. officials and warn them that this is a real danger to the world economy. I believe they understand the danger here, but not much can be done before the election."
Unless the fractious U.S. Congress can strike a deal, about $600 billion in U.S. spending cuts and higher taxes are due to kick in on January 1, threatening to push the U.S. economy back into recession and hurt world growth.
Not only are tax cuts enacted under President George W. Bush set to expire, but automatic spending cuts designed to exert pressure on lawmakers to strike a long-term budget deal will also take effect. The U.S. Congress will also soon face the need to raise the nation's debt limit to avoid a default.
A German government official said on Thursday that Germany would ask the United States again what it was planning to do about the fiscal cliff.
However Germany was expecting to hear that the issue cannot be resolved until after U.S. presidential and congressional elections on Tuesday, a day after the G20 meeting ends.
"You understand that from a European view, these are important questions also for the world economy that we want to factor out," the German government official said.
Germany itself has come under pressure to give struggling euro zone countries more time to fix their debt problems, an issue likely to come up in Mexico.
The G20 meeting comes on the heels of talks among many of the same officials at the International Monetary Fund autumn meetings in Tokyo last month. Policymakers then backed a series policy reforms aimed at pressuring the United States and Europe to tackle their debt woes.
The G20 took over from the smaller Group of Seven, comprising only industrialized countries, as the world's main economic policy forum after the global financial crisis erupted in 2008.
The initial sense of unity around the need for urgent action to prevent a new depression has given way to deep differences over issues such as government spending to boost growth and the right pace of belt-tightening to tackle high debt levels.
BASEL III DELAY?
Policymakers will be at loggerheads over new Basel III global capital and liquidity rules.
Those reforms, which require banks to hold roughly three times more capital than under prior rules, are set to be phased in starting in January, but face a growing backlash from British and American regulators who say the rules are too complex.
High-profile regulators including Thomas Hoenig, a director at the U.S. Federal Deposit Insurance Corp, which regulates some banks, and Bank of England director of financial stability and Basel Committee member, Andrew Haldane, have both slammed the rule for being overly complex.
JPMorgan Chase & Co Chief Executive Jamie Dimon has said his bank could face more than $1 billion in annual overhead costs from new international and domestic financial regulations, including the Basel III capital standards.
A senior Canadian finance official said on Thursday Canada would push for timely implementation, and said it was imperative to keep to the agreed timelines.
The accord, which was agreed to by world leaders in November 2010, is set to be phased in over six years starting in 2013. But U.S. and European regulators are still at the drafting stage and have joined banks and lawmakers in calling for a re-think, raising the specter of calls for a formal delay.
Despite the issue's prominence, a G20 source said Russia wants to keep financial regulation discussions at a more technical level when it takes over the presidency of the group from Mexico after the November 4-5 meeting.
G20 officials will also look to Spain for signs of whether it will bite the bullet and seek a bailout.
Spain's reluctance to seek financial aid is fueling frustrations and concerns about the unresolved potential for the euro zone's debt crisis to hurt world growth further. Many officials in Mexico will be looking to Spanish Economy Minister Luis de Guindos for signals as to the government's plans.
Spain is under pressure to seek a bailout as it struggles to cope with high public debt and the cost of recapitalizing its banks. Euro zone sources said they expected Spain to seek financial aid from the euro zone in November.
A government source told Reuters on Wednesday that Prime Minister Mariano Rajoy had not ruled out applying for a rescue, but the Spanish leader has signaled he will not rush unless market conditions deteriorate significantly.
Former Italian Prime Minister Silvio Berlusconi's threat to withdraw support from Mario Monti's government has stoked political uncertainty in Rome, which the IMF has also urged to seek euro zone assistance to help stem the bloc's debt crisis.
Policymakers are also expected to review a formula for giving developing economies more power at the International Monetary Fund.
Greece's debt woes are likely to be relegated to backroom talk, though nagging questions over how the next bailout will be funded remain a headache for European paymaster Germany ahead of elections there next year.
(Reporting by Krista Hughes, Alonso Soto, Daniel Flynn, Paul Eckert, Alexandra Alper, Tetsushi Kajimoto, Lesley Wroughton, Julien Toyer, Sarah Marsh, Gernot Heller, Louise Egan and Francesca Landini; Writing by Simon Gardner; Editing by William Schomberg and James Dalgleish)