Debt burden quickens global power shift

The world’s most affluent nations will take decades to work off the biggest buildup in debt since World War II. The political costs may be permanent, laid bare at this week’s Group of Eight summit of leading industrial powers.

Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114 percent of gross domestic product in 2014, more than triple the 35 percent of the main emerging economies including China, the International Monetary Fund forecasts.

The run-up in debt has hastened a power shift that is sapping the industrial world’s authority to impose its economic doctrine, currency arrangements or greenhouse-gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip amid the global recession they spawned.

The eight-nation forum that starts tomorrow in L’Aquila, Italy is “a lot less relevant given its makeup and given developments in the world,” French Finance Minister Christine Lagarde said July 5. “Big players, like emerging economies, India, China or Mexico, are invited, but they’re given only a jump seat outside of the main summit.”

The industrial world is beset by the harshest economic conditions in a lifetime: a projected U.S. budget deficit of 13.6 percent of GDP in 2009, unmatched since World War II; an annualized 14.2 percent contraction in Japanese GDP in the first quarter, also the worst since the war; in the first three months of 2009, German exports had their steepest quarterly decline since 1970 when the data were first compiled.

Market Capitalization

Reflecting the relative fortunes of the G-8 and emerging markets, developing nations’ share of worldwide stock-market capitalization has climbed to a record 24 percent from 15 percent at the start of 2007 as investors piled into the fastest-growing economies.

“Despite a global economic contraction and some uncertainties over growth in domestic demand, China’s economic recovery will continue,” Zhang Jianhua, head of the central bank’s research bureau, said in this month’s China Finance magazine.

While the surge in borrowing has prompted calls for alternatives to the dollar as a reserve currency, emerging- markets policy makers aren’t near consensus on a plausible option. Chinese Deputy Foreign Minister He Yafei said July 2 the dollar will reign supreme for “many years to come.”

Summit Agenda

Staunching the recession, combating climate change, promoting trade and dealing with Iran top the agenda of the G-8, a grouping of 880 million people with combined GDP of $32 trillion that includes the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia.

Divisions persist over dialing back stimulus measures — Germany says now is the time to begin curbing deficits — and the scope of financial oversight. Britain opposes more intrusive market oversight proposed by the European Union.

“Different countries are pulling in different directions and that is, I think, quite troubling,” said Niall Ferguson, a history professor at Harvard University in Cambridge, Massachusetts. The uncoordinated response is “one of the classic symptoms of a global crisis.”

While the eight deliberate, leaders of five developing economies — China, India, Brazil, Mexico and South Africa — hold a parallel summit nearby before the G-8 meeting.

Led by China, the emerging economies don’t share the “somber fiscal outlook” of the affluent world, the IMF says. The IMF says the debt won’t be repaid as quickly as after World War II, which ended with debt topping 250 percent of GDP in the U.K., 200 percent in Japan and 100 percent in the U.S.

‘Moral Duty’

In wartime, governments exercised “comprehensive control” over the economy and citizens felt a “moral duty” to buy war bonds, the IMF said in a June 9 report.

Rich nations’ debt constituted 78 percent of GDP in 2006, the year before the financial crisis took hold, while emerging- markets debt has dipped from 38 percent, the IMF says.

The industrial world’s borrowing spree “decreases its ability to maneuver,” said Paul Hofheinz, president of the Lisbon Council, a Brussels research group.

Underscoring the need for a broader global consensus, leaders of the Group of 20 nations have met twice in response to the global financial crisis since the G-8 gathered in Japan last year and plan a third summit in Pittsburgh on Sept. 24-25.

Climate Clash

Lesser-developed countries upstaged the 2008 G-8. Arguing that emissions cuts would stunt the economic growth that is lifting millions out of poverty, they forced through a joint statement entitling countries to tackle global warming according to their “respective capabilities.”

The climate clash will be rerun in L’Aquila, as the countdown starts to a United Nations summit in December to hammer out a replacement to the Kyoto Protocol.

Russia plays a dual role, straddling the G-8 and acting in concert with developing economies. In a sign of the shifting world order, Russia last month hosted the first-ever summit of the BRIC economies — Brazil, Russia, India, China — financiers of $1.1 trillion in U.S. Treasury debt as of April.

How much U.S. debt to keep remains in dispute. Russian President Dmitry Medvedev and Indian economic adviser Suresh Tendulkar have questioned the dollar’s dominance of the world’s $6.5 trillion in currency reserves.

The BRIC get-together failed to endorse a Russian call for diversification from the dollar, showing it is easier to denounce the U.S.-led world order than come up with a viable alternative.

“The credibility of the Anglo-Saxon model is under threat,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in a Web commentary last month. “Yet there are no ready substitutes that are able and willing to step in.”

Source: Bloomberg

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