April 15, 2011 / 12:49 AM / in 7 years

G20 backs early-warning plan against future crises

WASHINGTON (Reuters) - Finance chiefs from leading world economies agreed on Friday on a new plan to identify countries whose policies could put the global economy at risk if left unchecked.

Under the agreement, levels of debt and borrowing and trade balances will be used to determine if a country should be put under the microscope and asked to make reforms.

French Finance Minister Christine Lagarde said the Group of 20 countries made “huge progress” on the path to more balanced growth and said seven major economies would automatically be subject to review, possibly along with others.

France is chair of the G20 this year.

Countries representing more than 5 percent of the combined output of the G20 will be subject to a deeper analysis of imbalances in their economy, finance officials said.

The list would include debt-burdened countries such as the United States and others like China that rely heavily on exports for growth. France, Britain, Germany and Japan would also be among the countries undergoing special scrutiny.

“Our aim is to promote external sustainability and ensure that G20 members pursue the full range of policies required to reduce excessive imbalances,” the G20 said in a communique issued at the close of a full-day meeting.

One potential shortcoming of the pact is that countries will not be bound to follow any policy recommendations that emerge. Instead, officials hope peer pressure brings change.

Many economists say imbalances caused by big surpluses and deficits contributed to the 2007-2009 financial crisis, which triggered the worst global recession since World War II.

The G20 has become the main forum to prevent the type of boom-bust cycles that preceded the meltdown. Agreeing on how best to do that has grown difficult, particularly now that the darkest days of crisis have passed.

Among the big emerging economies, China has been especially wary about the monitoring process which it fears could be used to add pressure for reform of its currency system.

At a summit in China this week, leaders from the five so-called BRICS countries -- Brazil, Russia, India, China and South Africa -- repeated calls for a monetary system less reliant on the U.S. dollar.

However, Chinese Vice Finance Minister Zhu Guangyao said the G20 agreement on Friday “fully reflects each country’s demands,” including “reforming the international financial system and strengthening financial regulation.”

“We’re satisfied with the results,” he said.

The G20 said it would take “due account” of exchange rates and monetary policy frameworks when addressing imbalances.

Developing countries in the past have blamed loose policy at the U.S. Federal Reserve policy for worsening imbalances and stoking inflation abroad. The United States points at an undervalued Chinese yuan as the source of large Chinese trade surpluses.

The communique appeared to offer some room for countries to avoid tough policy prescriptions.

“National circumstances will ... be taken into account,” the communique said without elaboration.

Reporting by Reuters IMF/G20 team; Writing by Steven C. Johnson and Glenn Somerville, editing by William Schomberg and Leslie Adler

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