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World financial leaders see signs of recovery

G-20 finance leaders sought to quell concerns about the economic recovery Friday as debt-laden Greece asked for a massive aid package.
/ Source: Reuters

G-20 finance leaders sought to quell concerns about the economic recovery Friday as debt-laden Greece asked for a massive aid package, training the spotlight on other rich countries' precarious public finances.

The Group of 20 rich and emerging economies were trying to reach consensus on thorny issues, including how best to recoup the cost of bank bailouts and which policies would succeed in leveling out dangerous imbalances in the global economy.

A draft communique from G-20 finance chiefs said the global economy is regaining its footing, although at an uneven pace, a G-20 officials involved in the discussions told Reuters.

G-20 members, meeting at the International Monetary Fund's headquarters, will stress the need for rebalancing that growth — meaning big surplus countries like China must consume more and be more flexible on currency rates, while the indebted like the United States need to tighten up spending.

Greece was not formally on the agenda, but it was clearly on the minds of top officials after the country appealed to its European Union partners IMF for emergency loans of up to 45 billion euros ($60.5 billion), potentially the biggest-ever bailout of a country.

Finance ministers rallied behind Greece, aiming to show that they would not allow debt troubles to fester and threaten the European Union or world economy.

"If the house of your neighbor is on fire, even if it is a small house and, maybe, it is your neighbor's fault, you'd better not ignore the fire," Italian Economy Minister Giulio Tremonti said.

"You'd better use a fire extinguisher, if you have it, and we have it. Otherwise the fire will reach your house as well, even if it is a beautiful and big house."

Large debt burdens
The IMF has warned that unsustainable debt burdens across the major economies posed a threat to growth, and could destabilize the global economy if left unchecked.

Debt levels are approaching World War Two highs in the United States and in much of Europe. That will likely drag down growth, leaving rich countries more dependent on exports, the IMF warned in its World Economic Outlook earlier this week.

A G-20 official involved in drawing up the meeting's communique said the IMF has cautioned those countries that they were too optimistic when they recently submitted economic growth estimates for the next few years.

Without policy changes, swelling surpluses in some countries and soaring debt in others risk getting worse, the IMF told the G-20, according to the source.

"The result of this exercise is that, according to the IMF, growth expectations sent by almost every country are too optimistic, and there are risks that global imbalances will become more acute," the official told Reuters.

The multi-speed recovery, with emerging nations racing ahead while advanced economies lag behind, has exacerbated the problem. British Finance Minister Alistair Darling expressed concern about Europe's lackluster growth.

"What worries me is that growth in the European Union has been sluggish. Germany was out of the recession before us but is now flat, Italy was out of recession before us but has gone back into recession," he said.

"It is in all our interests that Europe gets through this, and part of that process will be to sort out the Greek problem along with the IMF."

Troublesome issues
The G-20 has supplanted the smaller G-7 club of rich countries, an acknowledgment of the growing power of countries such as China and Brazil and that the rich world now needs their help.

G-7 finance ministers met separately Thursday night but issued no communique, a sign of the G-7's diminished standing.

Troublesome issues in front of G-20 officials vary from whether to tax banks to make them pay for bailouts to how to persuade China to let its yuan currency appreciate.

In a sign of the sensitivities over the currency issue, which has a rising number of countries pressuring Beijing to let its yuan strengthen in value, the communique will not specify actions for individual countries but only refer to a broad mechanism for balancing growth, the G-20 source said.

The issue of rebalancing global growth also is loaded with potential pitfalls.

Reducing imbalances means China and other export-dominated economies must adopt policies to support domestic growth, which means letting currencies rise more rapidly and investing in social safety nets to try to promote consumer spending.

That could cool growth in the short run and make it hard to create sufficient jobs for a rapidly growing population.