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TEXT - Geithner letter to G20 finance ministers

Interest Rates NewsJun 04, 2010 11:51PM ET
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BUSAN, South Korea, June 5 (Reuters) - Following is the text of a June 3 letter by U.S. Treasury Secretary Timothy Geithner to his G20 counterparts who are meeting on Saturday in South Korea.

"Looking ahead to the meetings in Busan this weekend and the Toronto Summit later this month, I am writing to offer some suggestions on how we might focus our efforts.

"First, we should reaffirm our commitment to safeguard the recovery and strengthen prospects for growth. The G-20's strong policy response to the crisis has played a pivotal role in restoring economic growth, but concerns about growth as Europe makes needed policy adjustments threaten to undercut the momentum of the recovery. Europe has outlined a strong package of reforms and financial support to address those concerns, and full implementation of those commitments will help limit the risks to global recovery. But we all have a strong interest in working to reinforce the ongoing recovery in private demand.

"Second, we all need to undertake economic reforms that will help support short-term demand growth and boost longer-run potential growth. This should include structural reforms designed to make our economies more flexible, dynamic and productive and to enhance the role of internal demand in surplus economies.

"Third, achieving a strong and sustainable global recovery requires that we make further progress on rebalancing global demand. Given the broader shifts underway in the U.S. economy toward higher domestic savings, without further progress on rebalancing global demand, global growth rates will fall short of potential. In this context, we are concerned by the projected weakness in domestic demand in Europe and Japan. In keeping with the Pittsburgh Framework on Strong, Sustainable, and Balanced Growth, the necessary shift toward higher savings in the United States needs to be complemented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand, together with a more flexible exchange rate policy, in China.

"Fourth, we need to put in place credible commitments to restore fiscal sustainability over the medium term. These plans need to be designed, to borrow the IMF's phrase, in ways that are 'growth friendly,' recognizing that the necessary path of adjustment will vary across countries.

"Fiscal reforms are necessary for growth, but they will not succeed unless we are able to strengthen confidence in the global recovery. The challenge is to demonstrate the capacity to deliver fiscal sustainability over the medium term without creating the perception that this will require a generalized, undifferentiated, move to pull forward consolidation plans. The necessary and inevitable withdrawal of fiscal and monetary stimulus needs to be calibrated to proceed in step with the strengthening of the private sector recovery in our economies.

"Fifth, further progress on financial repair is critical to global economic recovery. This requires, particularly in parts of Europe, further efforts to restructure and recapitalize the banking system.

"This process would be advanced by a reaffirmation by governments of existing capital and guarantee programs, and by a broader effort to enhance transparency and disclosure of the major interconnected financial institutions.

"Finally, we should accelerate progress on our financial reform agenda. In the United States, both chambers of Congress have now passed bills that address all of the major principles agreed to among the G-20, and we expect a strong package of reforms to become law this summer.

"In the G-20 and FSB we have broad agreement on the major elements of financial reform, and we have made enough progress now on the details in key areas that we should be able to move forward on a more ambitious timetable than we set out in Pittsburgh.

"Uncertainty about the ultimate shape of these new rules creates potential financial headwinds for recovery. We should reduce that risk by trying to move forward quickly on the key elements of the international financial reform agenda:

"We should work to reach agreement as expeditiously as possible on the broad elements of a new capital framework, including the new overall capital and leverage ratios, the length of the transition period, the key issues on new definitions, and liquidity requirements. We would then aim to finalize the specifics by the Seoul Summit. We can improve confidence and help recovery by clarifying both the magnitude of the increase in required common equity and a transition period that will provide sufficient time for financial institutions to meet the new rules without being forced to reduce assets in a way that could damage economic recovery. Higher quality and more capital, stronger liquidity, and lower leverage will help ensure that globally active financial institutions are better able to withstand financial and economic shocks. This is the central and core reform needed to promote a more resilient global financial system in the aftermath of the crisis . We should agree to put place across the major financial markets a consistent framework for oversight of derivatives markets. We should subject all dealers and all major participants in the derivative markets to supervision and regulation, including conservative capital and margin requirements, disclosure and reporting requirements, and strong business conduct standards to mitigate the potential for systemic risk and market abuse. . We should agree on a stronger framework of transparency and disclosure requirements across institutions and markets. . And we need to move forward on the emerging framework for managing the failure of large, global financial institutions, with stronger national resolution frameworks, and principles for how to cover the financial costs of financial crises. These elements should be the heart of the message we deliver at Busan and Toronto.

"We also will want to make progress on the full range of other commitments we made in Pittsburgh, from phasing out inefficient fossil fuel subsidies to advancing the reforms of the international financial institutions."

TEXT - Geithner letter to G20 finance ministers

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