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G20 to keep stimulus for now

(Agencies)
Updated: 2009-09-05 09:02

LONDON: The G20 will promise this weekend to keep economic support packages in place until recovery is certain and seek to reassure financial markets they have credible plans to withdraw the stimulus when appropriate.

US Treasury Secretary Timothy Geithner speaks during a news conference at the G20 Finance Ministers meeting at a hotel, near Horsham, in southern England, March 14, 2009. [Agencies]

With finance ministers and central bankers from the Group of 20 developed and emerging nations meeting in London, a document obtained by Reuters on Friday showed the International Monetary Fund has revised up its forecast for the world economy this year and next.

The IMF now forecasts global shrinkage of 1.3 percent in 2009, a shade less than its April forecast of a 1.4 percent contraction, and growth of 2.9 percent in 2010, revised up from 2.5 percent previously.

Policymakers are cautious about declaring victory yet, especially given most major economies are still shrinking this year and only expected to post sluggish growth next year.

"Unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and unemployment," said IMF chief Dominique Strauss-Kahn at a conference in Berlin on Friday.

Ministers laying the groundwork for a G20 leaders' summit in Pittsburgh are also expected to discuss putting curbs on bank bonuses, tighter financial regulation and reform of international institutions.

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G7 sources have told Reuters that the G20's communique, due on Saturday, will likely maintain the pledge to keep policy accommodative for as long as was needed.

"The biggest risk is to think that the job's done -- that recovery is guaranteed. No country can be complacent -- we've got to see this through," British finance minister and meeting host Alistair Darling said late on Thursday.

Still, with interest rates at record lows and trillions of dollars thrown into their economies to fight the crisis, policymakers are keen to show they have exit strategies in place lest financial markets take fright that inflation will rocket and public finances fall apart.

"Now is not the time to exit. But I would like to make it clear that the ECB has a strategy, and we stand ready to put it into action when the appropriate time comes," said European Central Bank President Jean-Claude Trichet said in Frankfurt.

BONUS CURBS

With unemployment likely to rise for some while and eat into government poll ratings, the politicians are also looking for someone to blame and will stress that banks cannot return to business as normal.

France, Germany and Britain on Thursday put forward joint proposals to change the bonus culture at banks that many say was the root of the current crisis. These include deferrals and subjecting payments to clawback but fall short of the tax being advocated by some charities and initially the French.

Ministers will look at enhanced regulation of systemically important banks and ways in which these institutions can be wound up if needed without shaking the financial system.

US Treasury Secretary Timothy Geithner is pressing the G20 to back tough new international standards for bank capital and liquidity. The US Treasury said on Thursday a comprehensive agreement should be reached by the end of 2010, with countries implementing the standards by the end of 2012.

Other issues on the table are ensuring the IMF gets the full resources promised to it at April's London summit when leaders pledged a mammoth $1.1 trillion increase in the lender's firepower.

Dinner on Friday will discuss how the IMF and the World Bank can be reformed to reflect better the emergence of the new economic powers.

Representatives from Brazil, Russia, India and China will meet on the sidelines of the meeting and Geithner is expected to join them with IMF representation likely to be on their agenda.

US President Barack Obama's administration wants to make climate change a big issue for the Pittsburgh summit and will call on fellow G20 members to eliminate fossil fuel subsidies and increase oil market transparency.