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G8 considers how to move out of crisis mode

From Reuters

By Anna Willard and Patrick Graham

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LECCE, Italy (Reuters) – The world’s rich nations have started to consider how they will unwind emergency steps to rescue their economies once recovery is certain, according to a draft statement from a meeting of Group of Eight finance ministers on Saturday.

The communique showed the group more positive about the economy than it has been since the credit crisis deepened last year, although there was no sign of a unified line on “stress tests” for banks — one issue where North America has been pushing Europe to act more.

“There are increased signs of stabilization in our economies,” said the draft, obtained by Reuters on Saturday before the release of an official communique later in the day.

Ministers, meeting in southern Italy, discussed an “appropriate framework” under which stimulus policies would eventually be ended, and asked the International Monetary Fund to analyze possible strategies, the draft said.

But it added that the group was fully committed to previous international agreements on aid for the world economy, and would provide more stimulus if needed as long as it did not threaten to drive up inflation or do lasting damage to state budgets.

“While the economic outlook is improving, the situation remains uncertain,” the draft said.

“We must remain vigilant to ensure that consumer and investor confidence is fully restored and that growth is underpinned by stable financial markets and strong fundamentals.”

A surge in long-term government bond yields over the past several weeks shows markets fear huge sums of money poured into economies, through state spending and interest rate cuts, will ultimately fuel inflation and cripple government finances.

EXIT STRATEGIES

Pressure has therefore been building in the G8 for talks on ways to wind down the stimulus as soon as it is no longer needed — “exit strategies” that would prevent market interest rates from climbing high enough to threaten economic recovery.

A G8 source, who declined to be named, told Reuters late on Friday that the IMF report would probably be presented at the fund’s October annual meeting in Istanbul.

The IMF study could give governments some political cover when they eventually start making painful cuts in state spending to bring budget deficits under control, and when central banks begin to raise interest rates back up from near-zero levels.

Germany and Canada on Friday urged the G8 to hold its first talks on exit strategies. But other countries are less enthusiastic about discussing the subject and are less convinced that the worst of the economic slump is over.

Euro zone industrial production shrank by more than a fifth in April, new data showed on Friday, raising risks that the second quarter will be weaker than expected.

“We must not get wrapped up in the pick-up when we’re still in the process of relaunching, stimulating and making sure the stimulus plans are working,” French Economy Minister Christine Lagarde told a briefing late on Friday night.  Continued…

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