* Debt reduction proposal source of tension
* Emerging nations voice concerns about stimulus spillovers
* G20 communique likely to push for swifter Libor reform
By David Gaffen and Jan Strupczewski
April 19 Finance leaders of the G20 economies on
Friday were set to debate specific targets for reigning in debt
levels and the potential dangers from the latest round of
aggressive easing of monetary policy from the world's biggest
They were also poised to demand swifter resolution to
setting guidelines for financial benchmarks like the Libor
interest rate in the wake of a global rate-rigging scandal.
But a rethinking of the austerity push among the world's
biggest economies loomed as the biggest talking point. Advanced
economies, particularly in Europe, have undertaken sharp
austerity drives in recent years to curb growing debt, but those
efforts have at times damaged economies already suffering from
capital flight and under-investment from the private sector.
EU Economic and Monetary Affairs Commissioner Olli Rehn told
Reuters in an interview on Thursday that a period of reduced
spending and borrowing was necessary to calm markets concerned
about out-of-control debt levels, particularly in peripheral
European countries. That time has passed, he said.
"Decisive action was taken. Now as we have restored the
credibility in the short-term, that gives us the possibility of
having a smoother path of fiscal adjustment in the medium-term,"
The United States has opposed committing to any targeted
level of public debt as a percentage of GDP, a common way to
measure a nation's debt burden.
"I think an issue that will come up ... is the issue of hard
targets, or not, for debt-to-GDP," Canadian Finance Minister Jim
Flaherty told reporters on Thursday.
In a 2010 study frequently cited by policymakers, Harvard
professors Kenneth Rogoff and Carmen Reinhart found that on
average, economies contract when the debt-to-GDP ratio surpasses
90 percent - a level G20 officials were set to debate.
However, the study's results were disputed by researchers at
the University of Massachusetts at Amherst, who said growth for
countries with those ratios was actually 2.2 percent.
Weakness in economies that undertook the most severe
measures to cut deficits undercut the austerity argument. The
United Kingdom, in particular, is suffering its third recession
in the last five years.
Still, Flaherty urged the G20 to set hard targets on debt
and deficit, though he added that troubled economies should move
more slowly towards balanced budgets than others.
"It's important for confidence by investors, which leads to
more investment, economic growth and jobs," Flaherty said.
The unprecedented level of monetary stimulus designed to
reinvigorate struggling large economies, including the United
States, the euro zone and Japan, has raised concerns about
excessive capital flight to developing nations.
In a communique on Thursday, the Group of 24 developing
nations, whose ranks include Brazil, India, South Africa and
Mexico, called on the advanced economies to "take into account
the negative spillover effects ... of prolonged unconventional
monetary policies including on inflation and the volatility of
capital flows and commodity prices."
The Bank of Japan is attempting to end decades of stagnation
by pumping $1.4 trillion into its economy, some of which is
expected to find its way into emerging markets. Local currency
funds have pulled in $16.7 billion in the first quarter of 2013
worldwide, the most in more than two years, according to Lipper,
a unit of Thomson Reuters.
"There is a call from the G24 members to have clear
coordination and better communication between advanced economies
and emerging markets ... towards using coordination as a way to
mitigate these potential asset appreciation bubbles. The
consensus is that this is something that has to be closely
monitored," said Mexican Finance Minister Luis Videgaray.
Videgaray has cause for concern.
In the days following the Bank of Japan's announcement, for
example, the Mexican peso jumped 2.5 percent against the dollar
to its strongest in 20 months. Against the yen, the
peso surged over 9 percent.
Bank of Japan Governor Haruhiko Kuroda, in response to
questioning about the country's aggressive efforts, said he
didn't see signs of asset price bubbles "brewing in emerging
nations" as a result of monetary stimulus.
"It's true that the massive monetary stimulus of advanced
economies may affect emerging economies including through
capital inflows," he said. "Such spill-over effects had been
discussed even before the G20 meeting, and will likely be on the
agenda at (this week's) meeting too."
The G20 finance ministers are due to release their formal
communique around midday on Friday. They plan to task the
Financial Stability Board, a coordinating body of global
financial regulators, with overseeing the reform of financial
benchmarks such as Libor, two sources familiar with the
situation told Reuters on Thursday.
An early draft of a communique G20 financial officials will
be debating asks the FSB to take on the role after a global
interest rate-rigging scandal that involved some of the world's
The International Organization of Securities Commissions
came out with a report this week saying that financial
benchmarks should be based on actual transactions rather than
estimates, such as is the case with Libor.