G20 urges U.S. to act quickly to avoid default

By Anna Yukhananov and Louise Egan

WASHINGTON | Fri Oct 11, 2013 10:36pm EDT

(Reuters) - Finance officials from the world's biggest economies on Friday pressed the United States to head off a potentially devastating default and vowed to proceed carefully when the time comes to normalize monetary policy.

A communiqué issued at the end of a meeting of Group of 20 finance ministers and central bankers said the United States "needs to take urgent action to address short-term fiscal uncertainties."

The U.S. government has been partially shut since October 1 amid a budget standoff between congressional Republicans and the White House. Republicans also have refused to raise the nation's $16.7 trillion debt ceiling.

Officials from around the globe have warned that failing to raise the debt cap would wreak havoc on the global economy.

Anton Siluanov, finance minister of this year's G20 chair, Russia, said the mention in the group's communiqué amounts to a "general wish for a fast solution."

Republicans presented a plan on Thursday to provide a short-term increase in the U.S. debt limit, spurring hopes a deal could soon be reached. On Friday, the White House and lawmakers were still struggling to work out the details.

"Our American colleagues are doing everything possible in order to find a mutual understanding or agreement with the Congress," Siluanov told reporters.

Solving the impasse is crucial for a global economy that the G20, which accounts for 90 percent of world output and two-thirds of its population, said is showing signs of improvement but still facing "downside risks."

Maintaining growth momentum is likely to get even more challenging as central banks begin winding down the monetary stimulus launched during the 2007-2009 global financial crisis.

The prospect of the U.S. Federal Reserve reining in its stimulus by year end spooked world markets earlier this year and plunged some developing countries into turmoil as the gusher of cheap dollars that had poured into their economies dried up.

Echoing the statement from a summit of G20 leaders in St. Petersburg last month, the group of advanced and emerging nations pledged to ensure any monetary policy changes are "carefully calibrated and clearly communicated" and said navigating swings in capital flows would remain a challenge.

It said emerging economies remained important drivers of global growth, even though many have slowed sharply in recent years and are expected to brake further.

"A while ago there was an excess of exuberance and now perhaps an excess of pessimism," Brazil's central bank chief, Alexandre Tombini, said in a statement prepared for delivery to a meeting of finance officials on Saturday.

"Brazil and many emerging economies in general are in a much stronger position than usually portrayed to withstand the current transition turbulence," he said.

'BETTER THAN NOTHING'

Most of the attention, however, was on the risk of a U.S. default, which has clouded the global economic outlook.

Siluanov said U.S. Treasury Secretary Jack Lew left the gathering early to participate in debt talks.

"We trust that the administration and the Congress will arrive at a mutually acceptable solution," he said.

Lew has said the United States would be unable to meet all its obligations if the debt limit is not lifted by October 17.

Major U.S. stock indexes rose on Friday on the heels of their biggest gain in nine months a day earlier as the Republican offer stirred hopes for a quick deal.

But there were also worrying hints of the chaos that could ensue if Washington were to miss a debt payment.

Banks and money market funds are shunning some Treasuries normally used as collateral for short-term loans, a sign that a deadlock over the debt ceiling could disrupt a key source of day-to-day funding in the financial system.

Hong Kong's securities exchanges plan to slap a bigger discount on Treasuries used as collateral.

"Politicians don't quite seem to have grasped how important the Treasury market is to the global financial system," HSBC chief economist Stephen King told Reuters Global Market Forum.

While the Republican plan offered the hope of short-term relief, it could also bring the country back to the brink of default before year end.

"Whatever reduces uncertainty is positive but I think that really to reduce uncertainty in a substantial way we would need a long-term solution," said Ewald Nowotny, a member of the European Central Bank's Governing Council.

"Still, it seems to be better than nothing."