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WRAPUP 5-G8 nations consider exit from credit crisis

Published 06/13/2009, 02:19 PM

* Rich nations take first step toward ending rescue steps

* IMF to help plot withdrawal of stimulus policies

* Countries say signs of economic recovery still shaky * Differences persist on bank stress tests

* Ministers bemoan return of excessive market speculation

(Adds analyst comment, ministers' criticism of speculators)

By Anna Willard and David Lawder

LECCE, Italy, June 13 (Reuters) - The world's rich nations, heartened by signs the credit crisis is easing, have started to consider how to unwind rescue steps for their economies once recovery is certain, their finance ministers said on Saturday.

Meeting in southern Italy, the ministers described their economies in the most positive terms since the collapse of Lehman Brothers nine months ago ushered in the world's worst financial crisis since the Great Depression of the 1930s.

"The force of the economic storm is receding. There are encouraging signs of stabilisation across many economies," said U.S. Treasury Secretary Timothy Geithner as finance ministers of the Group of Eight nations ended two-day talks. [ID:nFCB000003]

A surge in long-term government bond yields over the past several weeks shows financial markets fear huge sums of money poured into economies through drastic stimulus will ultimately fuel inflation and cripple state finances.

But ministers clearly differed over how quickly the world should start rolling back huge state spending plans and hiking interest rates. And there was continued disagreement over other aspects of the crisis, especially testing the health of banks.

The meeting's final joint statement [ID:nLD422044] said they had asked the International Monetary Fund to help them analyse possible ways of ending economic stimulus policies.

A G8 source, who declined to be named, told Reuters that the IMF report would probably be presented at the fund's October annual meeting in Istanbul. Most private sector economists do not expect any major tightening of fiscal and monetary policies in the developed world before next year.

NO EARLY EXIT

Pressure has been building in the G8, particularly from fiscally conservative nations such as Germany and Canada, for plans to wind down stimulus as soon as it is no longer needed -- "exit strategies" that would prevent market interest rates from climbing high enough to threaten economic recovery.

The communique stressed there would be no immediate end to stimulus, noting unemployment might continue rising even if production began picking up. "While the economic outlook is improving, the situation remains uncertain," it said.

Geithner indicated the United States was unlikely to tighten policy any time soon: "It is too early to shift toward policy restraint."

Underlining the precariousness of any economic recovery, data released as the meeting began on Friday showed euro zone industrial production shrank by more than a fifth in April, dropping faster than markets had expected. [ID:nLC172970]

The debate over stimulus is diplomatically sensitive because if some countries roll back their programmes earlier than others, they may be accused of not doing their fair share to ensure a global recovery.

Russian finance minister Alexei Kudrin described the meeting as "stormy", featuring heated debate on what stage of the crisis the world had reached. [ID:nFCA000184]

BANK STRESS

The meeting appeared to make little progress on one tool for restoring confidence to the global financial system: "stress tests" to determine the financial strength of banks.

Canadian Finance Minister Jim Flaherty called on Europe to conduct more such tests and to reveal the results, at least on a system-wide basis.

But Europe's leading powers are divided on publishing results of their tests, which are run by different regulators using different methods, and there was no mention of stress tests in the G8 communique.

French Economy Minister Christine Lagarde said the Europeans would "explain nicely to the Americans" that there would be no quick consensus on stress tests. [ID:nLD270094]

Speaking after the meeting, Flaherty said he had become "much less frustrated" at the Europeans' stance, but added that differences of opinion remained.

"As the economy improves, enthusiasm for international cooperation seems to abate faster than financial market tensions," Marco Annunziata, chief economist at UniCredit Group, said in a report on the meeting.

MARKETS

The communique identified volatile commodity prices as a major threat to economies; crude oil has jumped nearly 75 percent since the end of February, even though it remains about 50 percent down from last year's record peak.

Ministers from both France and Italy blamed much of the volatility on speculators, in the same way that they blamed financial speculation last year for worsening the credit crisis.

"Speculation is coming back, a certain type of finance is raising its head again and doing the same not very nice things it was doing until last summer," Italian Economy Minister Giulio Tremonti told reporters. [ID:nLD426487]

At the instigation of the Italians, the G8 ministers released a set of principles and standards for the conduct of business globally, calling for more information and protection for investors, tighter regulation, and a stronger sense of commercial ethics.

"The breadth and intensity of the prolonged downturn have revealed the importance of strengthening our commitment to standards of propriety, integrity and transparency," said a summary of the principles, to be called the "Lecce Framework".

The G8 groups the United States, Germany, Japan, Britain, France, Italy, Canada and Russia.

For stories from the summit, click: [ID:nL5701713]

For key summit issues for markets, click: [ID:nLA602412] (With additional reporting by Gernot Heller and Gavin Jones; writing by Andrew Torchia and Patrick Graham) (patrick.graham@thomsonreuters.com; +44 7590 458 997)

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