G-20 flags US fis­cal cliff, EU debt woes

The Pak Banker - - Front Page -

MEX­ICO CITY

Fi­nance chiefs of the world’s 20 lead­ing economies are ring­ing alarm bells over the US fis­cal cliff and Europe’s debt woes at a meet­ing in Mex­ico this week­end as they look to push back deficit re­duc­tion tar­gets to help boost growth.

Un­less a frac­tious U.S. Congress can reach a deal, about $600 bil­lion in gov­ern­ment spend­ing cuts and higher taxes are set to kick in on Jan­uary 1, threat­en­ing to push the Amer­i­can econ­omy back into re­ces­sion and hit world growth.

But with the U.S. pres­i­den­tial elec­tion loom­ing on Tues­day, deal­ing with the fis­cal cliff has been de­layed.

“The Amer­i­cans them­selves ac­knowl­edge that this is a prob­lem,” a G20 of­fi­cial said on con­di­tion of anonymity. “The U.S. ad­min­is­tra­tion says it doesn’t want to fall off the fis­cal cliff, but right now it can’t tell us how ex­actly it will ad­dress it be­cause that is­sue is on ice ahead of the elec­tion.”

Tax cuts en­acted un­der Pres­i­dent Ge­orge W. Bush are set to ex­pire in Jan­uary, when au­to­matic spend­ing cuts de­signed to put pres­sure on law­mak­ers to strike a longterm bud­get deal are also set to kick in. “What re­mains a sort of key as­pect is that the United States is not re­spect­ing the cur­rent com­mit­ments (to re­duce its deficits) and does not have a cred­i­ble fis­cal con­sol­i­da­tion plan,” one Euro­pean of­fi­cial said.

The U.S. Congress will also soon have to raise the na­tion’s debt limit to avoid a de­fault.

An ini­tial con­sen­sus around the need for ur­gent ac­tion to pre­vent a new de­pres­sion has given way to deep dif­fer­ences over is­sues such as spend­ing to boost growth and the right pace of belt-tight­en­ing to tackle high debt lev­els.

Jose An­gel Gur­ria, head of the Or­ga­ni­za­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment, said on Satur­day the G20 should ap­peal to the United States to avoid the fis­cal cliff, but added he was op­ti­mistic that Congress would strike a deal.

“I still be­lieve it is not go­ing to be ap­plied,” Gur­ria said in an in­ter­view be­fore the meet­ing of G20 fi­nance chiefs, which for­mally starts on Sun­day.

Of­fi­cials are also con­cerned about Ja­pan’s own fis­cal cliff, and rec­og­nize that pre­vi­ous com­mit­ments made by de­vel­oped coun­tries to cut their bud­get deficits in half by 2013 and to sta­bi­lize their debt load by 2015 look un­fea­si­ble.

U.S. and Euro­pean of­fi­cials are also likely to come un­der pres­sure from G20 peers for drag­ging their feet on im­ple­ment­ing the so-called Basel III ac­cords on fi­nan­cial reg­u­la­tions, the world’s re­sponse to the 2007-09 fi­nan­cial cri­sis.

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 this meet­ing, which ends on Mon­day.

Spain’s re­luc­tance to seek fi­nan­cial aid is stok­ing wor­ries that Europe’s debt cri­sis could fur­ther hurt world growth. The gov­ern­ment 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 say they ex­pect Spain to seek fi­nan­cial aid from the euro zone in Novem­ber.

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