G8 seeks to undo stimulus and mounting recovery indications

06-14-2009 14:33

The G-8 meeting took place in Lecce, Italy, where the finance ministers of France, Italy, the UK, Canada, Japan, Russia, the US and Germany attempted to determine an agenda for their leaders for their next congress in L’Aquila, Italy, on July 8-10. Furthermore it started to compose a strategy for reducing budget deficits and bank rescue plans as investors begin to fear inflation and the indicators point to an economic recovery.

Too early to shift toward policy restraint

According to G-8 representatives it is recommendable to determine exit strategies in order to respond adequately when worldwide growth is a fact. They also consulted the IMF concerning how to execute these strategies without reviving the global slump. Furthermore, G-8 officials stated that it is too early to rein back over $2 trillion in stimulus measures.
At the end of the meeting, Timothy Geithner, US Treasury Secretary, said: “policy should mainly focus on growth and it is premature to move toward policy control.”
Policy makers realize that it is premature to retrieve stimulus packages as it may negate economic recovery while permitting them to endure too long could increase borrowing costs. Last week the yield on the 10-year US Treasury note increased to a record level since October and for that reason focus is also on soothing markets.

Russian finance minister: full confidence in US Dollar

The comments by the G-8 officials did not refer to interest rate or currencies considering the fact that bankers were not present at the meeting.
The Dollar showed the largest increase versus the Euro today, while treasuries climbed for the third day. Alexei Kudrin, Russia’s minister of finance, declared his infinite confidence in the US Dollar. The Russian central bank stated that moving some reserves from Treasuries is an option, on which the US Dollar and bonds declined on June 10 while the yield on the 10-year security surpassed the level of 4%.

Optimistic reports

The outlook by the G-8 was the most optimistic since the fall of Lehman Brothers Holdings Inc. in September 2008, which proves another evidence that the worldwide slump is easing. Economies believe that more evidence will be provided by the German investor sentiment and US housing reports during the following days.
Home Depot Inc. stated June 10 that the fiscal 2009 profit decrease could turn out more positive than was estimated. According to a statement by Virgin America Inc. on June 12, its net loss in the initial quarter of 2009 reduced as a result of a better occupation of their planes.
However, last week’s figures proved that the situation remains delicate. The major auto producer in Europe, Volkswagen AG, reported June 12 that “very fragile” worldwide car markets still have not began to recover, while April resulted in a record fall in European industrial production.
The markets seem to stabilize but the situation continues to be insecure due to unstable commodities and rising unemployment which form barriers, according to the G8 ministers of finance.

Credible exit strategy

Both Alistair Darling, UK Chancellor of the Exchequer and Timothy Geithner notified strongly not to shift prematurely while German Finance Minister Peer Steinbrueck opted for a “plausible exit strategy”.

Much less frustrated

Such counter pressure resulted in criticism ahead of the comments by Jim Flaherty, the Canadian finance minister, who stated that it jeopardized obstructing a global recovery.
The G-8 did not mention the topic. Canada's Minister of Finance, James Michael Flaherty, stated later that the meeting eased his frustrations towards Europe’s point of view. According to Giulio Tremonti, Italian finance minister, Europe could begin to review its tactics.
Marco Annunziata, chief economist at UniCredit Group, said: “The inconvenient reality for Europe is that so far the US stress test, although maybe not perfect, turned out successful in supporting banks to increase their financial means and boosting confidence.”