G-20 focuses on policy clarity, wary of new market turmoil

Russia's Anton Siluanov at the G-20 finance ministers' meeting in Moscow.
Kirill Kudryavtsev | AFP | Getty Images
Russia's Anton Siluanov at the G-20 finance ministers' meeting in Moscow.

The Group of 20 nations, wary of renewed market volatility, stressed the need on Friday to shift policy carefully and communicate clearly as countries seek to chart a course to recovery.

A draft communique prepared for G-20 finance ministers and central bankers meeting in Moscow said an action plan would be readied for their leaders in September to boost jobs and growth, continue monetary policy support and increase domestic demand where appropriate.

"Policy uncertainty has recently triggered an increase in financial markets volatility and financial conditions have tightened," the draft obtained by Reuters said.

"This has mostly affected emerging market economies, and some of them experienced a large increase in local bond yields, depreciation of currencies and liquidity pressures."

Ministers will review the text over dinner and will call for greater clarity in policy "messaging" after signals of a withdrawal of U.S. monetary stimulus caused a global selloff in stocks and bonds, and a flight to the dollar.

G-20 leaders will meet in St. Petersburg in September.

A paper that International Monetary Fund staff prepared for the Moscow meeting warned that financial market turmoil could deepen unless policymakers were careful.

"The current market turbulence could continue and deepen. Growth could be lower than projected due to a protracted period of stagnation in the euro area, and risks of a longer slowdown in emerging markets have increased," the paper, seen by Reuters, said.

"The eventual exit from low rates and unconventional monetary policy in advanced economies could pose challenges for emerging economies, especially if it proceeds too fast or is not well communicated."

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Fed Chairman Ben Bernanke's announcement two months ago that the central bank may start to wind down its $85 billion in monthly bond purchases sparked a panicky selloff, particularly in emerging markets.

Investors were calmed by testimony to Congress this week by Bernanke, who is not in Moscow, although he said the exit plan from money-printing remained on the cards.

"The communique will reflect the need for coordinated efforts and for the predictability of quantitative easing policies," Russian Finance Minister Anton Siluanov said after meeting officials from the BRICS emerging markets caucus.

China shift

G-20 sources said China would be urged to encourage domestic demand-driven growth and allow greater exchange-rate flexibility as part of wider efforts to rebalance the global economy.

"We are determined to continue progress with rebalancing of global demand, which requires internal rebalancing through structural reforms and exchange rate flexibility," the draft said.

Beijing offered an early olive branch, announcing long-awaited interest rate reforms removing a floor on the rates banks may charge clients for loans, which in turn should reduce the cost of borrowing for companies and households.

The G-20 took the lead in the 2008-09 financial crisis and now faces a multispeed global economy in which only the United States appears to be nearing a self-sustaining recovery.

China, for years the engine of global growth, is suffering a slowdown amid doubts over the stability of its financial system, Japan has only recently embarked on a radical fiscal and monetary stimulus experiment, and Europe's economy is more stop than go.

The BRICS emerging markets caucus—Brazil, Russia, India, China and South Africa—also met on Friday but looked unlikely to make progress on joint steps, such as a shared pool of foreign exchange reserves, to guard against capital flight.

Do more to boost growth

The United States is beating its fiscal targets thanks to improving growth, and Washington is putting increasing pressure on Europe to do more to foster growth. Germany, in contrast, is seeking internationally agreed debt reduction goals.

The draft communique referred to credible medium-term fiscal strategies but said they should be flexible. On growth, it was more definite, saying:

"Large surplus economies should consider taking further steps to boost domestic sources of growth, while deficit economies should implement measures to improve competitiveness."

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G-20 labor ministers held a joint session with finance ministers earlier, putting the jobs crisis in Europe—where youth unemployment is above 50 percent in debt-strapped Greece and Spain—at the center of the debate.

The communique pledged to boost jobs and growth via a "comprehensive" series of structural reforms to raise employment and productivity.

The G-20 also backed a fundamental tax rethink that takes aim at the loopholes used by multinational firms and responds to widespread anger among voters hit with higher tax bills to cover soaring national debts.

The group endorsed a tax action plan drawn up by the Organization for Economic Cooperation and Development that said the existing system didn't work, especially when it came to taxing companies that trade online.

The plan is one of the major "deliverables" that will go to the St. Petersburg summit hosted by President Vladimir Putin.

G-20 delegates arriving in Moscow ran into a protest over the jailing of a prominent Russian opposition politician. Alexei Navalny, who organized protests against Putin's election for a third Kremlin term last year, was sentenced to five years in prison for theft in a case that has drawn international condemnation.

Navalny was released on bail on Friday pending an appeal.

—By Reuters.