G20 may cut debt below 90% of GDP

Financial leaders of the world's 20 biggest economies will consider next week in Washington a proposal to cut their public debt over the longer term to well below 90 per cent of gross domestic product, a document prepared for the meeting showed.

The proposal, prepared by the co-chairs of the G20 Working Group on the Framework for Growth, follows agreement of the leaders of G20 countries in June last year to set ambitious debt reduction targets beyond 2016, when, under an earlier agreement from Toronto in 2010, debt was to stop growing.

"The co-chairs proposed that: 'over the longer-term, G20 members should gear their fiscal policy towards achieving a debt level that is well below 90 per cent of GDP,'" a document prepared for European Union delegates for the meeting said.

"We take note of the proposal made by the co-chairs on fiscal objectives as a good basis for discussion," said the document, endorsed by EU finance ministers on Saturday and seen by Reuters.

The European Union itself, however, has a more ambitious debt ceiling of 60 percent of GDP for its 27 members and will suggest a lower target for the G20 would be better, too.

"Our experience with...the 60 per cent of GDP reference value shows the importance of a more ambitious debt anchor. Such a debt anchor is needed with a consolidation path that is carefully calibrated to sustain the recovery," it said.

"Advanced G20 economies should commit to a common debt reduction anchor including fiscal adjustment plans which point to a clear and credible downward path of general government debt levels," the document said.

Such targets would be easy for the European Union where the debt ratio is now 90 per cent, or even for the United States with a debt of around 105 per cent.

But they could prove impossible for countries like Japan, where debt is well above 200 percent.

To beat deflation and help stagnant growth, the Bank of Japan has launched the world's most intense burst of monetary stimulus ever, pledging to inject about $1.4 trillion into the economy in less than two years.

The G20 is expected to discuss the spillover effects on emerging market economies from monetary easing in Japan and other advanced economies, Japan's Finance Minister Mitsuhiro Furusawa said on Friday.

The massive scale of the BoJ's stimulus pushed the yen to a four-year low against the dollar this week and has jolted Japanese bond prices, with the 10-year bond yield rebounding to 0.635 per cent on Friday from a record low of 0.315 per cent hit last week after the BoJ announced its policy moves.

The European Union will warn the G20 next week that such Japanese policies are not without risks.

"We welcome Japan's efforts to revive domestic growth. However, longer-term concerns remain as current economic policies risk increasing Japan's dependence on fiscal and monetary stimulus while bold structural reforms are needed to tackle underlying challenges," the document said.

"In view of its elevated gross public debt level, we support Japan's forthcoming fiscal consolidation measures, including the consumption tax hikes foreseen for 2014 and 2015," it said.

The EU will also call on China to accelerate the liberalisation of the country's financial sector and to strengthen its social safety net and move quickly towards a market determined exchange rate system.