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Most G20 countries have agreed to debt-reduction targets: Official

Prime Minister Stephen Harper talks with United States President Barack Obama as Saudi Arabia's King and Prime Minister Abdallah Bin Abd al-Aziz Al Saud looks on during the G20 Summit in Toronto, June 26, 2010.

JIM YOUNG/REUTERS/Jim Young

The Group of 20 will likely agree on specific targets for slashing their deficits and addressing the staggering debt loads they accumulated to fend off economic collapse, European Commission President Jose Manuel Barroso said Saturday.

Europe's top official made the comment in a briefing with reporters ahead of the summit on Sunday, where fiscal consolidation will be the central economic topic. Such an agreement would help paper over sharp differences that were highlighted in recent days as officials from the world's advanced economies emphasized the difficulties associated with putting themselves on a more sound fiscal footing without scuttling the global recovery.

In fact, Mr. Barroso said that benchmarks proposed by Prime Minister Stephen Harper last week in a letter to his G20 counterparts have been agreed to among top officials from most countries.

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"The minimum deficit goal will probably be accepted," Mr. Barroso said, referring to Mr. Harper's call for G20 nations to cut their budget shortfalls in half by 2013.

The need to attack debt loads in several of the biggest economies without stifling the global rebound is a "balancing act" for the G20, Mr. Harper said Saturday while speaking to business leaders, acknowledging that the debate over how quickly and aggressively to cut stimulus spending has produced economic "tensions."

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Mr. Barroso echoed comments from Mr. Harper and other leaders as they sought to put a united face on one of the more contentious issues on the table this weekend, contentious mainly because of the different speeds at which the various G20 economies are healing, and differences in their fiscal health.

"We are all aiming at the same goal - economic growth," Mr. Barroso said.

That may be true, but the gulf on the issue appeared to widen in recent days as countries such as Germany and Britain suggested that they might push for stricter targets than what Mr. Harper proposed, while U.S. President Barack Obama has warned that certain economies in the group are still too fragile to withstand severe budget cuts.

Brazil expressed concern Saturday that some European countries are cutting too fast, putting the global recovery at risk and potentially harming developing nations should it cause another downturn.

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I'm pleased that there does seem to be a growing understanding and acceptance of the necessity - particularly in the midterm - to have credible plans to tackle the growth of deficits and debt and the sovereign risk that that entails. Canadian Prime Minister Stephen Harper


"The emerging countries should not carry the burden for the recovery alone," said Brazilian finance minister Guido Mantega, who is representing his country in place of President Luiz Inacio Lula da Silva, who opted to stay home and deal with the government's response to flash floods.

"This is a joint project. The burden should be borne by us all."

Mr. Mantega said Mr. Harper's proposal to place debt as a share of gross domestic product on a downward path by 2016 is "quite reasonable," but may be hard to meet for some G20 members.

Mr. Harper, meanwhile, stressed that on the broad strokes at least, all nations are on the same page.

"I'm pleased that there does seem to be a growing understanding and acceptance of the necessity - particularly in the midterm - to have credible plans to tackle the growth of deficits and debt and the sovereign risk that that entails,'' Mr. Harper said, echoing French President Nicholas Sarkozy and U.S. Treasury Secretary Timothy Geithner, who both tried to downplay talk of divisions within the G20 on deficit reduction during separate conversations with reporters.

Speaking at a press conference after his arrival in Toronto Saturday, Mr. Geithner said talk of disagreements over how best to secure the recovery were exaggerated. G20 countries have "more in common than in difference," Mr. Geithner said, adding that the U.S.'s deficit-reduction plan over the next few years is actually more aggressive than Germany's.

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Mr. Geithner acknowledged that the U.S. was taking the role of history teacher, reminding its counterparts in the G20 that hasty fiscal retrenchment after previous crises has a proven record of pain. But he suggested that other countries understood this and would adjust policies to meet their various national circumstances.

"Everybody is still working to ensure they are repairing the damage of this crisis."

In similar fashion, Mr. Sarkozy said there was no dispute between Europe and the U.S. over whether governments should start cutting or keep the stimulus pumping.

Mr. Sarkozy said all G8 members agreed there is a need to plan for reduced deficits and debt and that countries will do so based on their own circumstances.

"The question today is on the reduction of debt and deficits. No one disputes the necessity. The question is what way and how deep," he said.

However, economists believe that friction could emerge in the debate before any agreement is reached.

Mr. Harper wants G20 nations to develop specific plans for austerity in advance of the next meeting in Korea in November. Though Canada and many European countries see Mr. Harper's targets as a minimum goal, economists figure that efforts to meet them could stretch some of the shakier economies too much.

"That might be a bit harsh," said Bank of Montreal deputy chief economist Douglas Porter. "I think that would be a bit ambitious for a few of countries, and I'm thinking of the U.S. It's important at this point to make sure the recovery sticks before putting on the brakes."



"The question today is on the reduction of debt and deficits. No one disputes the necessity. The question is what way and how deep. French President Nicholas Sarkozy


The Group of Eight leaders moved Saturday afternoon from Huntsville, where the G8 summit was held, to Toronto for the bigger G20, which begin later in the evening with a dinner.

Nations are pushing to keep flexibility in their budgets to enable them to address their domestic economic issues, and to deal with political concerns. The U.K. and Germany, for example, have already unveiled austerity plans, while the U.S. is seeking to keep stimulus in place longer.

"It's much easier to collectively expand than it is to collectively contract," said Don Brean, a finance professor at Toronto's Rotman School of Management.

"What is required is a clear agenda in each of the individual countries as to when and how much they will consolidate," Mr. Brean added, saying that will help to satisfy capital markets which have become nervous about underwriting the big deficits countries such as the U.K. have been running.



To soften the blow to global growth that could come as advanced economies march to austerity, Mr. Harper said countries must also go beyond cuts and explore "structural reforms," while emerging-market economies must do more to spur a sustainable increase in demand.

The Prime Minister's comments came as China again warned its G20 partners to avoid using the summit to pressure Beijing into moving more quickly to relax control of its currency. Canada and the United States have praised China's announcement earlier this week that it would stop fixing the yuan to the U.S. dollar, but Canadian officials including Mr. Harper, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have suggested that the Chinese currency is still very undervalued and more must be done to allow it to appreciate.

Senior Chinese officials at the G20 gathering said just before President Hu Jintao was scheduled to meet with Mr. Obama that they will consider their own economic needs before making further exchange-rate moves, and won't capitulate to outside pressure. Mr. Obama and several key lawmakers in Washington contend that China's artificially low currency gives its exporters an unfair advantage at the expense of U.S. manufacturers, and Canada argues that the weak yuan means the loonie is disproportionately boosted when the U.S. dollar drops.

A push for banks to hold more capital will also be a big part of the G20 meetings.



"The progress that the U.S. has made will be important in driving the world not just to agreements here but to conclusions on financial regulations within the kind of timeframe we've been looking at. Canadian Prime Minister Stephen Harper


"There's much more consensus the global system is under-capitalized," Bank of Canada Governor Mark Carney said Saturday in a radio interview. "I think we are going to move to a common agreement on what that capital is and what the level needs to be by the Seoul summit in November. We're making serious progress on capital."

American officials are signaling Mr. Obama will push hard on capital agreement.

Mr. Obama enters the G20 on the heels of a big win, having just pushed a financial reform package through Congress on Friday.

"The progress that the U.S. has made will be important in driving the world not just to agreements here but to conclusions on financial regulations within the kind of timeframe we've been looking at," Mr. Harper said Friday.

Mr. Obama's press secretary, Robert Gibbs, said Friday that "getting the reform bill passed was just a tremendously important step as we come here to discuss the state of the recovering world economy."

Still, there is work to be done to get major economies on the same side on bank capital. There is broad consensus on the need for stronger buffers against shocks, which the G20 highlighted as a goal at its gathering in Pittsburgh last year. However, how fast banks should be forced to strengthen their balance sheets is a point of contention.

Europe is pushing for a slow implementation period, to give its banks time to adjust, while the U.S. would prefer a faster implementation.

Raising capital is expensive for banks, and holding bigger cushions cuts into profitability, a tradeoff for the added stability of big cash hoards.

The discussions will be closely monitored by banks.

Banks in Canada are already sitting on large bulwarks of capital and are keen to get a decision. Bank executives here are concerned that they might be at a competitive disadvantage if other banks in Europe and the U.S. are allowed to run with slimmer capital for long.

With files from Grant Robertson, Kevin Carmichael, Brian Milner, Bill Curry and Tara Perkins.

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