G20 leaders face rising deficit worries

TORONTO - World leaders, grappling with the worst financial crisis since the 1930s, were gathering on Thursday for global economic talks seeking to maintain solidarity in the face of new challenges.

New leaders in Australia, Japan and Britain could alter the dynamics.

With recoveries in their countries proceeding at starkly different paces, leaders of the 20 largest industrial and developing nations found themselves at odds over how to strike the right balance between continued government stimulus spending and confronting ballooning budget deficits.

Divisons also persisted on proposals for a global bank tax and over how much multinational banks should be required to keep on reserve as a cushion against loan losses.

"The most pressing issue is sustainable economic growth," said Canada's finance minister, Jim Flaherty. But he told a news conference before a speech to the Toronto Boarde of Trade that this means different things in different parts of the world.

"There are clearly some countries, particularly some European countries, that need to fiscally consolidate on an urgent basis," he said.

He noted that Canada's economy is fundamentally strong and that its banks weathered the financial crisis without failures or government bailouts. "We are the envy of the world," he said in voicing opposition to a global bank tax.

Security was tight as foreign leaders arrived during the day and their motorcades tied traffic into knots near the airport and on roads into town. Barricades turned Toronto's downtown core into a virtual fortress.

Police said they took a man into custody on Thursday after searching a car and finding containers of petrol and unspecified weapons. The car was stopped near a hotel where the French delegation is staying for the summit. Workers at the hotel had walked off the job Thursday as part of a labor dispute.

Protests were light and scattered on Thursday, but more were planned for later in the week when the economic sessions get fully under way. Canadian police patrolled the Lake Ontario waterfront from powerboats and jet skis.

One of the first to arrive was Chinese President Hu Jintao, who came on Wednesday and held separate meetings on Thursday with Canadian Prime Minister Stephen Harper, the summit host.

Britain, Japan and, unexpectedly, Australia were sending new leaders to the G-20 summit. As leaders began arriving, Australia's ruling Labor Party abruptly ousted Prime Minister Kevin Rudd.

Julia Gillard replaced him, becoming Australia's first female leader. Wayne Swan, her new deputy and the country's finance minister, was to represent Australia at the Canadian meetings.

It will be the first appearance at international forums for British Prime Minister David Cameron and Japanese Prime Minister Naoto Kan. And both were bearing messages that US President Barack Obama might rather not hear.

Cameron comes after his government unveiled an emergency budget that contained higher taxes and the toughest cuts in public spending in decades. And Kan said this week that deficit reduction would be his top agenda item at the Canadian meetings and that Japan would soon start debating a possible sales tax increase to rein in the nation's bulging deficits.

Both are trying to avoid Greece-style crises over their bulging deficits.

By contrast, the US has generally said that governments worldwide should not pull back stimulus programs too quickly and risk choking growth.

Obama in a letter to other leaders cautioned against slamming on the brakes too hard, but encouraged trade "surplus" countries -- he didn't mention them but he clearly meant China Germany and Japan -- to do more to promote domestic spending.

Despite US appeals to refrain from removing stimulus measures too quickly, country after country is rushing to slash spending and raise taxes, including austerity moves in Germany and France.

German Chancellor Angela Merkel on Thursday defended her government's moves, saying in an interview with German public broadcaster ARD that "Germany has done much more to revive the global economy than most other nations." Germany is Europe's strongest.

The first of this week's two economic sessions is a meeting of the Group of Eight, the world's older leading industrial democracies - the US, Canada, Britain, Germany, France, Italy, Japan - plus Russia on Friday and parts of Saturday at a lakeside resort about 225 kilometres north of Toronto.

The larger group of 20 nations, including such major developing powers as China, Brazil and India, will meet at the Metro Toronto Convention Centre on Saturday and Sunday.

The leaders maintained remarkable unity at three previous summits, but that unity is now fragmented.

However, a move by China to let its currency appreciate against the dollar appeared to lessen trade frictions. Hu's government began on Monday to allow the Chinese yuian to rise after having fixed the yuan-dollar exchange rate for the past two years.

A more flexible yuan was seen as a critical development by the Obama administration to fulfill one of the G-20 pledges to address dangerous imbalances, such as China's massive trade surpluses and the United States' huge trade and budget deficits.

A stronger yuan, which is also called the renminbi, should provide relief for American, European and Japanese manufacturers which have struggled to compete with low-price exports from China.

Critics in Congress are still threatening China with sanctions unless the yuan moves significantly.


-AP