Finance chiefs appeal for U.S. to steer away from fiscal cliff

The U.S. is facing pressure to avoid running off its fiscal cliff amid warnings that failure to change course would trigger another global recession.

“People are concerned,” U.K. Chancellor of the Exchequer George Osborne told reporters yesterday (Oct. 11) at the International Monetary Fund’s annual meeting in Tokyo. “There was quite a lot of discussion.”

The U.S. will incur $100 billion in automatic spending cuts and more than $500 billion in expiring tax reductions in January, unless lawmakers strike a deal. The IMF this week said such a consolidation would tighten fiscal policy by 4% of gross domestic product, the most since the 1940s.

That’s powerful enough to ricochet around the world economy as a recovery from the 2009 recession already shows signs of weakening, said Canadian Finance Minister Jim Flaherty.

“It’s a very serious situation for all of North America and for the entire world,” Flaherty told Bloomberg Television on Oct. 11. “It means we’ll all go into recession. So it’s important this gets dealt with.”

Failure to craft a solution “is not acceptable at all,” Bank of America Corp. CEO Brian Moynihan said in an interview in Tokyo. “It’s important that it’s done sooner rather than later. We’ve been feeling it since last summer; to take that uncertainty away is key.”

U.S. Treasury Secretary Timothy F. Geithner said on Oct. 11 he agreed a delay isn’t a “responsible” strategy and that any accord should allow for deficit reduction over time and open up room for shorter-term investment.

“We’re going to take a run at it,” he said.

Brazil again criticized the Federal Reserve for embarking upon another round of asset purchases. Finance Minister Guido Mantega said such a policy is “selfish” because it hurts emerging markets such as his by subjecting them to volatile capital flows and currency movements.

“Brazil, for one, will take whatever measures it deems necessary to avoid the detrimental effects of these spillovers,” he said.

With next month’s presidential election capturing the attention of U.S. politicians, a bipartisan group of senators met this week to debate ways to reach a long-term deficit- reduction agreement. President Barack Obama has said he wants to allow scheduled tax increases on the wealthy. Republican challenger Mitt Romney opposes any rise.

The most likely outcome is a “two-step dance,” Vincent Reinhart, Morgan Stanley’s chief economist and a former Fed official, told a banking conference in Tokyo. Congress will extend almost all the provisions and promise more fundamental changes later, he said.

“At present, the U.S. has a lot of credibility, the U.S. government has a lot of credibility, the fiscal account doesn’t yet suffer from this correction, but this will not last forever,” Carlo Cottarelli, the IMF’s director of fiscal affairs, said on Oct. 9. “So there is a need for a plan.”

Bundesbank President Jens Weidmann identified the fiscal cliff as one of the reasons for the global economy being “in a difficult situation.” French Finance Minister Pierre Moscovici told reporters that the U.S. economy is “very solid.”

“I am sure they’ll find the way to climb their fiscal cliff,” he said.

Some signaled confidence that lawmakers will reach an agreement. South Korea Finance Minister Bahk Jae-Wan expressed “irresponsible optimism,” while World Bank President Jim Yong Kim said he’s “optimistic.”

“This is a real test of leadership for legislators in the U.S.,” Kim said. “After this election is over, it’s very important that they take positive steps.”