Wary of stimulus after G-20

LONDON – FINANCIAL markets are likely to remain buffeted by uncertainty over government policy despite an unprecedented pledge by the world’s top finance officials to cooperate as the global economy emerges from recession.

At a meeting in London at the weekend, finance ministers and central bankers from the Group of 20 nations said fiscal and monetary policy would stay expansionary as long as needed to ensure recovery.

That assurance could support fresh risk-taking in the markets this week, providing a moderate boost to global equities and prompting sales of the US dollar in favour of higher-yielding currencies such as the Australian dollar.

For the first time, the G-20 officials said there should be some coordination of policies to avoid destabilising economies when governments eventually start winding down costly stimulus schemes launched during the crisis.

This was important for long-term investors, who fear volatility in the currency and interest rate markets if some cash-strapped countries cut back fiscal spending and hike interest rates much sooner than others.

But the G-20 did not explicitly address big issues blamed for imbalances in the global economy, such as the value of China’s yuan. That raised questions over how much political will the group can really muster to coordinate policies.

And in some ways, the G-20 seemed less united than it did when it met at the height of the crisis in April. While the April meeting produced a broad consensus on reform to financial regulation, the latest meeting bickered inconclusively over issues such as curbing excessive pay packages for bankers.

If the G-20 has trouble setting common rules to regulate the finance industry, it may find it impossible to agree on sharing the fiscal burden of engineering a sustained economic recovery.

‘The spirit of coordination is confidence-boosting, but in reality withdrawing fiscal stimulus will be difficult to coordinate,’ said Lena Komileva, head of market economics for major developed economies at money broker Tullett Prebon.

‘Investors still fear an uncoordinated exit could create stealth competition and contribute to increased volatility in government bond yields. It may be the fiscal equivalent of competitive currency devaluation.’ — REUTERS