June 7, 2010 / 6:07 PM / 7 years ago

OECD, Canada urge clear plans for cutting deficits

MONTREAL (Reuters) - Countries with big deficits must offer clear plans on how they will balance their budgets to maintain investor confidence and avoid problems seen in Europe, top economic policymakers said on Monday.

The warnings came after finance ministers and central bankers meeting in South Korea reached an uneasy compromise on Saturday on the speed at which budget cuts should be made to calm global financial markets rattled by the spreading debt crisis in Europe.

“Make sure that you give signals to the markets about fiscal consolidation,” Angel Gurria, head of the Organization for Economic Cooperation and Development (OECD), told a conference in Montreal on Monday.

Gurria said it was imperative that countries announce their fiscal plans to avoid what happened with Greece’s debt crisis, when uncertainty spurred investors to sell the country’s bonds and drive its borrowing costs higher.

“Do we have to start now? No. Do we have to announce now? Yes,” said Gurria, secretary-general of the OECD, a group of 31 countries that promotes democratic government and market-based economies.

Financial markets fear that other countries could suffer the same fate as Greece, which has already taken drastic measures to bring its fiscal house in order.

Greece has pledged to cut its public deficit by almost a third to 8.7 percent of gross domestic product this year. Germany has also announced plans to pursue savings in an effort to shore up confidence in the finances of the 16 nations that use the euro.

Policymakers from Canada, whose banks weathered the 2008 financial crisis without any government support, expressed concern about the continuing economic uncertainty in Europe.

“We’ve pushed hard for those countries that need to fiscally consolidate in Europe to get on with it and to demonstrate their resolve,” Canadian Finance Minister Jim Flaherty told reporters in Toronto.

“This is important because there is a risk to economic growth generally if the fiscal consolidation issue is not dealt with expeditiously and effectively,” Flaherty said.

ECB‘S NOYER SAYS RECOVERY FRAGILE

Hungary rattled investors last week with comments suggesting the country was close to a Greek-style economic meltdown. It tried to back off those comments over the weekend.

European Central Bank board member Christian Noyer said that the recent developments in Greece show the recovery is fragile even though the short-term economic outlook for the European Union is favorable.

The Greek debt crisis illustrates the risks of postponing deficit control measures, Noyer told the Montreal conference.

Euro zone finance ministers are trying to set up a vehicle for emergency borrowing that would act as a safety net for countries that are not able to obtain financing from markets.

Although economic recovery has been fragile in Europe, structural reforms could allow it to “leave behind the crisis once and for all,” said Noyer, who is also governor of the Bank of France.

At the conference in Montreal, Bank of Canada Governor Mark Carney said he has confidence in the ECB’s actions to contain the European crisis.

Carney said “regulatory certainty” is needed to get the global financial sector back on track.

The United States and the European Union are trying to overhaul their financial regulation systems to safeguard against future financial crises.

The United States and other countries had proposed imposing a tax on financial services firms in an effort to make the firms pay for their own bailouts. But finance ministers from the world’s top economies on the weekend scrapped plans for such a tax.

Noyer said that it was more important for banks to have sufficient capital than to impose a tax on financial institutions. The danger would be to weaken the strength of banks’ balance sheets, Noyer said.

Noyer noted that his comments on Monday should not be taken as indication of policy decisions that will be taken at the European Central Bank governors’ meeting later this month.

Additional reporting by Jen Kwan: Editing by Jeffrey Hodgson and Peter Galloway

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