2010-06-28 16:12

Group of 20 leaders responded to the European debt crisis with deficit-reduction targets and agreed to pursue higher capital requirements for banks once economic recoveries take hold.

Advanced G-20 economies will aim to halve deficits by 2013 and start to stabilize their debt-to-output ratios by 2016, the group said in a statement yesterday after a meeting in Toronto. Leaders said nations can move at their own pace and also pledged to fulfill existing stimulus plans.

While President Barack Obama is pushing his counterparts to focus on spurring growth, leaders in the UK and Germany are already tightening spending to bolster investor confidence. US and European stocks both had their biggest weekly drops in more than a month last week as investors renewed concerns that countries may be unable to repay debts.

"The view of the business community is that we need fiscal restraint in order to ensure confidence and therefore sustainable economic growth," Gordon Nixon, chief executive officer of Toronto-based Royal Bank of Canada, the country's biggest bank, said in a telephone interview. "These targets are very important."

Canada's Prime Minister Stephen Harper said his country could meet the targets, which as chairman of the meeting he had proposed earlier this month, as soon as next year.

Treasuries are having their best year since 1995, returning 5 percent through June 24, according to Bank of America Merrill Lynch index data, as investors seek alternatives to Europe, where Greece and Spain had their credit ratings downgraded.

Markets giving direction

The UK's announcement last week about its planned budget cuts spurred an increase in gilts and the pound, and led Fitch Ratings Ltd to say Britain would keep its AAA credit rating.

"With respect to deficits, markets are giving Europe direction, and markets are more powerful than words from President Obama," said Tony Fratto, who served as a White House and US Treasury official under President George W. Bush.

Concerns about the global recovery have added to stress in the credit markets. Company debt offerings declined 3.8 percent last week to $38.6 billion, according to data compiled by Bloomberg. Renault SA, France's second-biggest carmaker, reduced a bond sale by 20 percent, citing "more difficult" market conditions.

Struck balance

"To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand," the G-20 statement said. "At the same time, recent events highlight the importance of sustainable public finances."

The balance struck by the G-20 means "everyone can sell it at home as a victory," said Carsten Brzeski, an economist at ING Group in Brussels. "The announcement to halve fiscal deficits by 2013 is huge."

The leaders addressed resistance to the deficit-reduction goals by limiting them to advanced economies. Brazil's Finance Minister Guido Mantega on June 26 said the targets were "draconian." Mantega represented Brazil at the meeting because President Luiz Inacio Lula da Silva stayed home after floods ravaged the northeastern part of his country.