G20 walks tightrope between growth and deficits

TORONTO (Reuters) - World leaders put the finishing touches on plans to build a more stable global economy on Sunday, but backed away from one-size-fits-all pledges as two years of crisis give way to an uneven recovery.

Balance was the buzz word. The Group of 20 rich and emerging economies wants to halve budget deficits by 2013 without stunting growth, and clamp down on risky bank behavior without choking off lending.

"Here's the tightrope that we must walk," Canadian Prime Minister Stephen Harper said at the start of meeting.

"To sustain recovery it is imperative that we follow through on existing stimulus plans... but at the same time advanced countries must send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order."

The leaders must also show progress on a promise made in September to rebalance the global economy. That means export-reliant nations such as China and Germany need to look inward for growth and indebted countries, including the United States, need to change their borrow-and-spend ways.

G20 sources told Reuters that there would be no reference to China's yuan currency in a final statement to be issued when meetings conclude later on Sunday. An earlier version of the document, obtained by Reuters, had welcomed Beijing's recent move to loosen its grip on the yuan.

"The majority of the members of the G20 welcomed the plans of the government of China on introducing a floating yuan rate," Russian finance official Andrei Bokarev told reporters, "But in the final communique this phrase will not be in there at the request of the Chinese side."

U.S. President Barack Obama, China's Hu Jintao and leaders from the other G20 economic powers gathered for the fourth time since the financial crisis spilling out of the United States in 2007 fueled fears of a new Great Depression.

The G20, which includes emerging economic powers as well as the developed economies where the economic trouble started, united last year to throw trillions of dollars into the battle against recession. The group has since become the predominant forum to coordinate tackling global economic challenges.

"The world economy is gradually recovering, but the foundations of the recovery are still not solid, the process is not balanced and there are still many uncertainties," Hu said.

SOURCES OF FRICTION

With sluggish growth in many developed countries, Washington fears Europe's drive to slash post-recession debt could derail the recovery, a worry also voiced by other G20 leaders, including Indian Prime Minister Manmohan Singh.

Singh said if too many countries pull back at once it "could provoke a double-dip recession."

UN Secretary-General Ban Ki-moon said he understood the pressure to put public finances back on a sustainable path, but urged G20 leaders to be mindful of who bore the burden.

"We must not balance budgets on the backs of the world's poorest people," Ban said at a G20 dinner Saturday evening.

The G20 leaders are set to announce a concerted effort to halve public sector deficits within three years and stabilize government debt. But they recognize that the start of that process will take place at different speeds, according to a draft communique that Reuters obtained.

The document acknowledges that the pace of the recovery from recession varies across the world and there is a delicate balance needed between restoring budget discipline and sustaining growth.

"There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery," it says. "There is also a risk that the failure to implement consolidation when necessary would undermine confidence and hamper growth."

TACKLING DEBT MOUNTAINS

Halving deficits looks easily achievable, considering President Barack Obama has already pledged to do that and Europe sees the target as a bare minimum.

Stabilizing debt as a percentage of total output within six years may be harder. Obama's budget forecasts show the debt ratio rising at least through 2015, and most advanced Western economies face rising costs as their populations age.

Regulatory reform was another source of friction. U.S. lawmakers agreed on a package of reforms, but the G20 has struggled to come up with a common set of rules.

Josef Ackermann, chief executive of Deutsche Bank, said he was concerned the lack of international consistency would lead to an uneven playing field.

"If you don't have a coordinated approach to regulatory (systems)... then there's the risk of regulatory arbitrage," he told Reuters in Cape Town.

More than 500 people were arrested after weekend protests against the G20 summit turned violent. Police used tear gas for a second consecutive day to disperse crowds.

(Reporting by Reuters G20 team; Writing by Emily Kaiser and Brian Love; Editing by David Storey and Janet Guttsman)