G-20 Urged by IMF, Europe to Coordinate When Reversing Stimulus

Group of 20 nations were urged by the International Monetary Fund and European governments to coordinate when they unwind emergency measures introduced to fight the global financial crisis. As G-20 economic policy makers prepare to meet in London on Sept. 4-5, German Finance Minister Peer Steinbrueck told his counterparts in a letter that failure to align so-called exit strategies risked “distortions of competition.” John Lipsky, the IMF’s No. 2 official, said in an interview that a lack of cooperation “could create strains and costs for other countries.”

The concern is that having committed more than $2 trillion in fiscal packages and aiding banks such as Citigroup Inc. and Royal Bank of Scotland Group Plc, failure by the G-20 to move in lockstep when reversing the assistance could fan inflation, lead to uneven debt burdens or distort markets. “These kinds of policies will be more effective if they’re unwound in a coordinated way rather than an uncoordinated way,” Lipsky, the IMF’s First Deputy Managing Director, said in Washington. “In many areas such as bank guarantees or other specific governmental support for markets, often these have spillover effects.”

G-20 finance ministers and central bankers are convening this week to shape an agenda for a Sept. 24-25 summit of their leaders in Pittsburgh amid signs the world economy is pulling out of its worst recession since World War II. Business activity in the U.S. improved in August more than forecast, the Institute for Supply Management-Chicago Inc.’s business barometer showed today.

‘Essential’ to Coordinate
“There cannot be a one-size-fits-all solution,” Steinbrueck said in the letter, which was seen by Bloomberg News. “However, it is essential that we coordinate our action internationally.” French Finance Minister Christine Lagarde cautioned against a premature withdrawal of support. “It would be irresponsible not to discuss exit strategies, but we’re not out of the crisis,” she told reporters in Paris today. While it’s too early to begin implementing exit plans, the 186-member IMF, which provided emergency loans to countries from Iceland to Hungary during the crisis, is devising a road map for how economies can reverse their stimulus efforts, Lipsky said.
Governments must also unite when introducing new financial rules to prevent future turbulence, U.K. Chancellor of the Exchequer Alistair Darling said today. “In this global world our markets are interdependent, and without strong international financial regulation, one country’s financial system can be played off against another,” Darling wrote in the Guardian newspaper.

Market Contribution
In his letter, Steinbrueck also said he wants to discuss at the G-20 how financial markets can be brought to make a “greater, internationally coordinated contribution” to financing the costs of coping with the economic crisis. Adair Turner, the chairman of the U.K. Financial Services Authority, last week proposed a “Tobin tax” on financial transactions. Lagarde said she backed taxing finance so long as it didn’t create distortions. “I’m all in favor of better regulation and of a financial or fiscal levy on all financial instruments, but not for some, detrimental to others,” Lagarde said. Central banks including the U.S. Federal Reserve and the Bank of England are already pursuing divergent policies. The U.K. central bank this month voted to increase its bond purchase program by 50 billion pounds ($81 billion) to 175 pounds, while the Fed is letting its Treasury-buying expire. The Bank of Israel unexpectedly increased interest rates on Aug. 24, the same day that Hungary’s central bank cut its benchmark. “Differentiation between countries is likely to become a bigger theme again for markets,” Joachim Fels, co-chief global economist at Morgan Stanley in London, said in an Aug. 26 report. The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.