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Business

G7 Vows to Tackle Imbalances, Splits on Aid

Finance heads from the world's seven leading economic powers said on Saturday they would pursue "vigorous" action to reduce global imbalances, but remained divided on how to free poor countries from debt and poverty.

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The IMF's Rodrigo de Rato, right, had sharp words about imbalances

During the meeting, finance ministers have received a sharp warning from the head of the International Monetary Fund, who said their policies could disrupt world markets. The warning from International Monetary Fund (IMF) Managing Director Rodrigo Rato on Saturday followed a twice-yearly meeting here of the IMF policy-making committee, made up of senior finance chiefs from around the world.

Earlier in the day finance ministers and central bankers from the powerful Group of Seven industrialized countries issued an upbeat statement on global prospects, predicting "solid growth for 2005" despite higher oil prices and an uneven pace of activity across several regions.

"Since our meeting in February the global expansion has remained robust and the outlook continues to point to solid growth for 2005," ministers said in a statement issued after the weekend talks in Washington.

But the Group of Seven -- Britain, Canada, France, Germany, Italy, Japan and the United States -- failed to find common ground on debt relief for the world's most impoverished nations, a failure that anti-poverty campaigners said would result in the deaths of millions more children.

Not so rosy

Rato dampened the optimism in the G7 statement with unusually pointed remarks aimed at some of the planet's most influential economic players. He said the global financial system was now out of kilter because of the huge US current account deficit, weak growth in Europe and Japan, the low savings rate of US consumers and inflexible currency regimes in Asia.

"If policies do not adapt, do not change to react to these imbalances, we run the risk of an abrupt correction of the markets ... (when) confidence for different reasons could evaporate or could be reduced," he told reporters.

G7-Gipfel in Washington

Japan's Finance Minister Sadakazu Tanigaki, right, and Bank of Japan Governor Toshihiko Fukui, left, listen to translation of speeches at the start of the G7 meeting.

Rato in addition cited the "need for Asian countries to have more flexible exchange rates" after the G7 implicitly called on China to relax its yuan-dollar currency peg. China's policy of pegging the yuan to the dollar has been harshly criticized by the US, which considers it tantamount to a government subsidy to the rising power's already highly competitive exporters.

Deficits or slow growth to blame?

The IMF head has not been alone in sounding the alarm about the persistent deficit in the US current account, a broad measure of trade in goods and services as well as certain financial transfers.

The current account shortfall unnerves Rato and other economists because it raises fears that foreign investors will lose confidence in the United States and begin to shun US assets. That could further weaken the dollar in a disorderly manner, prompting the US Federal Reserve to raise interest rates at a pace that would threaten global growth.

G7-Gipfel in Washington

US Federal Reserve Chairman, Alan Greenspan, left, and European Central Bank President, Jean-Claude Trichet at the G7 meeting.

US Treasury Secretary John Snow has acknowledged that Washington needs to shrink its current account deficit but maintains that much of the problem lies with weakness in Europe and Japan, which prevents consumers there from buying US goods.

That argument was rejected by a senior French official last week who said France in fact enjoys strong domestic demand and suggested that Washington was trying to shift the blame.

No breakthrough on debt

Despite any sign of concrete headway, G7 ministers meanwhile claimed progress towards their goal of erasing an $80 billion multilateral debt burden that sees more money go to interest repayments than to health or education in the developing world.

G7-Gipfel in Washington

Britains Chancellor of the Exchequer Gordon Brown, left.

"It's now recognised, I think for the first time from these meetings, that more money has to be made available," British Finance Minister Gordon Brown, the G7's current chairman, told a news conference. Brown has made debt relief for developing countries one of his priorities.

"What we must now do is get the international agreement on sums of money and we believe that that will come at Gleneagles," he said in reference to a Group of Eight -- the G7 plus Russia -- summit in Scotland in July.

The G7 ministers made no mention of a Brown-inspired proposal under which the IMF would sell a portion of its massive gold reserves to cancel the debt owed it by poor countries. The IMF says such a sale is technically feasible but the United States fears that offloading the reserves, which at current rates are worth 45 billion dollars, would destabilise the markets.

Besides the possible selling of IMF gold, other options to finance debt relief include a proposal by France and Germany to levy a global tax on airline tickets and jet fuel. German Finance Minister Hans Eichel said the proposal would be "very easy to put into place." He added, however, that he "regretted the absence of political commitment" of G7 partners.

Proteste gegen G7-Gipfel in Washington

Kendra Sudano, left, and Lia Gillis, right, both of Washington, hold up signs outside of the Treasury Department, in background, protesting the G7 meeting.

Campaigners berated the G7 bickering. They said another two million children younger than five would die before the Gleneagles summit in July from disease and malnutrition brought about by extreme poverty.

"They say they have the will, we all know the way, but once more the G7 have chosen delay," said Jonathan Hepburn, policy adviser for Oxfam International. "How many children have to die before these seven men in suits develop a sense of urgency?"

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