Finance news. My opinion.

Finance chiefs from the Group of 20 vowed to sustain efforts to end the worst global recession since the Great Depression to nurture an emerging economic recovery.

U.K. Chancellor of the Exchequer Alistair Darling and German Finance Minister Peer Steinbrueck were among the officials who began talks in London saying it was premature to unwind emergency measures to fight the crisis. They promised to start outlining how they would eventually do so.

“The time to start implementing an exit strategy is when you have seen the job through,” Darling said in an interview yesterday. “One of the biggest risks is saying the job is done, now we can throttle back. We have made those mistakes before.”

The G-20 policy makers arrived in the U.K. as a report in the U.S. signaled recovery will be sluggish. Unemployment reached a 26-year high in August even as the pace of job losses slowed. Such mixed signals are preventing them from declaring victory over recession and starting to peel back their record low interest rates and $2 trillion of fiscal stimulus.

“We are far from through these uncertain times,” Canadian Finance Minister Jim Flaherty told reporters. “Any potential recovery at this stage is fragile and subject to further shocks.”

The Paris-based Organization for Economic Cooperation and Development cut its estimate for contraction this year in the world’s leading industrialized countries to 3.7 percent from 4.1 percent, while predicting a “modest” return to growth.

‘Real Danger’

Such a situation prompted International Monetary Fund Managing Director Dominique Strauss-Kahn to note a “real danger” that policy makers will cut back too soon and imperil expansion.

“Given the fragility of the recovery, there are risks that it could stall,” Strauss-Kahn said in Berlin before heading to London. “Premature exit from accommodative monetary and fiscal policies is a principal concern.”

The IMF raised its forecast for global growth next year to 2.9 percent from the 2.5 percent it predicted in July, a G-20 government official said. The Washington-based lender also reduced its projection for the global contraction this year to 1.3 percent, from a 1.4 percent drop, the official said on condition of anonymity, citing a paper prepared for the G-20 auto loan interest rates.

Still, officials should start discussing how to remove the “enormous liquidity” in financial markets before it spurs inflation and government borrowing costs, Steinbrueck said.

Exit Preparation

“It’s necessary to prepare for a situation when the economic and financial crisis hopefully will be overcome,” Steinbrueck told reporters. “One can’t talk about the concrete point in time just yet.”

Crisis policies will have to stay in place for another six months, Russian Finance Minister Alexei Kudrin said in an interview.

Countries should ultimately coordinate when the time comes to withdraw stimulus, French Finance Minister Christine Lagarde said. Failure to unite would risk fanning inflation, leading to uneven debt burdens or distorting markets.

“It should be done together,” Lagarde said. “What the timing will be for each country will depend on the fabrics of the economy, on the status of where it is, on its size. We must have this coordination amongst ourselves.”

Central bankers are also planning for the exit — without rushing toward it. European Central Bank President Jean-Claude Trichet yesterday used a speech in Frankfurt to outline how the ECB’s stimulus measures will eventually be taken back. Many of its loans to bank will “naturally unwind” as they mature and demand for additional cash wanes, he said.

‘Premature’

“Notwithstanding some recent signs of improvement in the economic outlook, it is premature to declare the financial crisis over,” Trichet said. “Stressing the importance of the exit strategy should not be confused with its implementation.”

The G-20’s policy makers are meeting through today to shape an agenda for a Pittsburgh summit of their leaders in three weeks. They will release a statement about 4 p.m. in London.

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

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European Central Bank President Jean-Claude Trichet said the bank won’t necessarily raise interest rates when the time comes for it to start withdrawing other emergency stimulus measures.

“The term ‘exit strategy’ should be understood as the framework and set of principles guiding our approach to unwinding the various non-standard measures,” Trichet said at an event in Frankfurt today. “It does not include considerations about interest policy.”

The comments suggest the ECB is prepared to leave its benchmark rate at a record low of 1 percent for an extended period to nurture an economic recovery in the euro region. Trichet also said the ECB would only scale back its emergency lending to banks when credit starts to flow normally through the economy and inflation risks emerge.

Trichet is trying to ensure that when the ECB starts unwinding some of its non-conventional measures next year, investors don’t interpret that as a signal rate increases are imminent, said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. “The last thing they need right now is an expectation of a rate increase, with a very high risk that the current economic momentum may tail off by next spring,” he said.

Fed’s Exit Signal

The U.S. Federal Reserve signaled in minutes published Sept. 2 that it’s already trying to prepare investors for an end to some of its asset purchases. The ECB has focused on lubricating bank lending in an effort to rekindle growth in Europe. It is offering banks as much cash as they want at its benchmark rate for terms of up to a year.

“From today’s perspective, the need for enhanced credit support remains,” Trichet said. “Notwithstanding some recent signs of improvement in the economic outlook, it is premature to declare the financial crisis over. Stressing the importance of the exit strategy should not be confused with its implementation.”

Trichet used today’s speech to outline how the ECB’s stimulus measures will be withdrawn when the time comes. Many of the measures will “naturally unwind over time” as existing loans mature and demand for additional cash wanes, he said. The ECB can also use fine-tuning operations to absorb excess liquidity if needed, he added.

Inflation Risks

“One scenario would be that problems in money markets disappear before any upside risks to price stability emerge,” ECB Executive Board member Juergen Stark said at the same conference today free business cards. “This means that the non-standard measures would be withdrawn before rates are raised, and the withdrawal of the measures would not be expected to have much impact.”

If inflation risks emerge before problems in money markets dissipate, the ECB “may have to maintain parts of the enhanced credit support while rates are raised,” Stark said.

The economy of the 16-nation euro region probably expanded this quarter, bringing an end to its worst recession since World War II. It contracted just 0.1 percent in the second quarter after Germany and France, the two largest economies in the region, unexpectedly returned to growth.

The ECB yesterday raised its economic forecasts for the euro region to predict growth of about 0.2 percent in 2010 instead of a 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago.

G-20 Talks

Still, rising unemployment and the expiry of government stimulus packages may damp economic growth next year. Trichet flies to London today to discuss the global response to the financial crisis with officials from the Group of 20 nations.

International Monetary Fund Managing Director Dominique Strauss-Kahn said today there’s a “real danger” policy makers will withdraw support measures for their economies too soon, jeopardizing the global recovery from recession.

“Given the fragility of the recovery, there are risks that it could stall,” Strauss-Kahn said in a speech in Berlin. “Premature exit from accommodative monetary and fiscal policies is a principal concern.”

Speaking at the same conference, ECB council member Axel Weber said there will “in all likelihood be further tests and a bumpy road ahead.” While world leaders should discuss strategies for unwinding emergency policies, “the time is definitely not right to embark on taking such measures,” he said.

The ECB won’t raise interest rates before the third quarter of next year, a Bloomberg News survey of economists shows.

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More Americans than anticipated filed jobless-benefit claims last week, indicating companies remain focused on cutting expenses as the economy emerges from its worst recession since the 1930s.

Applications fell by 4,000 to 570,000 in the week ended Aug. 29, exceeding the 564,000 median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The total number of people collecting unemployment insurance climbed.

The firings are one reason economists project consumer spending, which accounts for 70 percent of the economy, will be slow to strengthen. Analysts surveyed by Bloomberg forecast a Labor Department report tomorrow will show August payrolls fell by 230,000, the smallest decrease in a year.

“We’re not making much progress in terms of the layoff picture,” said Jonathan Basile, an economist at Credit Suisse Holdings USA Inc., which correctly forecast the first-time filings figure. “These levels of initial claims are still consistent with declines in payrolls.”

Service industries, which account for almost 90 percent of the economy, shrank at a slower pace in August, the Tempe, Arizona-based Institute for Supply Management also reported today. The group’s index of non-manufacturing businesses rose to 48.4, exceeding forecasts and the highest level in 11 months, from 46.4 in July.

Markets

Stocks trimmed gains following the services data as optimism dimmed over the pace of the economic recovery. The Standard & Poor’s 500 Index was little changed at 994.76 at 10:33 a.m. in New York. Stock futures were boosted earlier in the day by the biggest rally in Chinese shares in six months. Treasuries trimmed losses, with benchmark 10-year notes yielding 3.33 percent, up from 3.31 percent late yesterday.

The median claims forecast reflected estimates from 40 economists surveyed. Projections ranged from 550,000 to 580,000. The Labor Department revised the prior week’s applications level up to 574,000 from a previous estimate of 570,000.

The jobless claims report showed the four-week moving average of initial applications, a less volatile measure, climbed to 571,250 last week, the highest level in more than a month, from 567,250.

Continuing Claims

Continuing claims jumped by 92,000 in the week ended Aug. 22 to 6.23 million. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, rose to 4.7 percent in the week ended Aug. 22 from 4.6 percent the prior week.

Thirty-two states and territories reported a decrease in claims, while 21 showed an increase. These data are reported with a one-week lag.

Initial jobless claims reflect weekly firings and tend to rise as job growth — measured by the monthly non-farm payrolls report — slows.

The economy has lost 6.7 million jobs since the recession started in December 2007, the most of any downturn since the Great Depression. Even so, the 247,000 drop in payrolls reported for July was lower than economists projected.

Manufacturers are still cutting staff. Whirlpool Corp., the world’s largest appliance maker, will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs as the housing slowdown hurts demand.

Job Cuts

The job cuts, which represent about 1.6 percent of Whirlpool’s workforce, will occur in 2010, the Benton Harbor, Michigan-based company said Aug. 28 in a statement.

Lockheed Martin Corp., the world’s largest defense company, plans to cut about 800 jobs at its Space Systems unit by yearend, the company said in a statement on Aug. 17.

Carmakers are among companies boosting production after a jump in sales following the government’s incentive program helped clear out inventories.

General Motors Co. called back 1,350 union workers, its biggest one-time increase in jobs since 2006, partly in response to demand from the government’s “cash for clunkers” program.

“We are adding production to almost all of our operations in the United States,” Tim Lee, GM group vice president overseeing global manufacturing and labor, said during a conference call on Aug. 18.

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European finance ministers agreed to push for tighter rules on bank bonuses as they prepared a common stance on overhauling the financial system before a summit of the Group of 20 nations.

Authorities need “stronger muscles and sharper teeth,” Swedish Finance Minister Anders Borg, whose nation currently holds the rotating European Union presidency, told a press conference today in Brussels after leading a meeting of EU finance chiefs. “The bonus culture must come to an end.” He said “there was a strong common European position” at the meeting.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said on Aug. 31 that they would press fellow G-20 leaders to regulate bank bonuses as well as require lenders to set aside more capital to avoid a repeat of the financial crisis that has caused global writedowns and losses of $1.6 trillion. G-20 finance ministers meet in London on Sept. 4-5 before a Sept. 24-25 summit of leaders in Pittsburgh.

French Finance Minister Christine Lagarde said she is optimistic that all 27 members of the EU will support proposals she brought to today’s meeting to curb bonus pay at banks. She said the options included a outright cap on bonuses, limiting them as a percentage of total pay, and taxing them.

“I think in the hours and days to come, all the ministers of finance will understand the suitability of the French position and will rally to it, and in a very formal way that may surprise you,” Lagarde said.

Today’s Meeting

U.K. Prime Minister Gordon Brown sees a cap on bonuses as difficult to enforce, the Financial Times reported yesterday, citing an interview. Chancellor of the Exchequer Alistair Darling did not attend today’s meeting.

“The British colleague endorsed the proposals in principle,” German Deputy Finance Minister Joerg Asmussen told reporters in Brussels. “Now we have to find a common G-20 position in London. It won’t be enough for Europe to take a position.”

The EU wants “a clear relationship between bonus and performance,” Asmussen said. Bonus payments will be more transparent and compensation may be deferred, he said.

“This will be a very difficult thing to get agreement on and implemented across a wide range of countries,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “Experience shows it needs to be sorted out on a country-by-country basis.”

Government Limits

Sarkozy said on Aug. 25 that France won’t hire banks that refuse to accept government limits on compensation, and executives from French institutions including BNP Paribas SA and Societe Generale SA promised to defer two-thirds of bonus payments for three years and to pay out one-third in shares.

“I don’t think the rest of the world will agree to those plans and efforts,” Otto Waser, chief investment officer at R&A Research & Asset Management AG said in a Bloomberg Television interview on Aug. 27. “Talents are just going to leave the industry and do their business elsewhere, so I don’t think it’s a workable avenue,” he said of the French proposals.

Amid concern over policy makers’ demands that banks also set aside more capital to prevent future crises, the cost of protecting bank bonds from default rose in Europe today by the most since May. The Dow Jones Stoxx 600 Banks Index was down 2.2 percent at 3:38 p.m. in London.

‘Up the Wall’

Merkel, who said the bonus system “quite rightly drives a lot of people up the wall,” joined forces with Sarkozy ahead of the last G-20 summit in London in April to demand steps to control executive pay, plus rules governing hedge funds and a new “architecture” for financial markets. Merkel, who faces elections on Sept. 27, has since voiced concern that governments may backslide on past G-20 commitments as the recession eases.

The euro-area economy barely contracted in the second quarter, with Germany and France returning to growth after the European Central Bank injected billions of euros into markets and governments offered consumers incentives to spend. World Bank President Robert Zoellick said today the chances of a “truly global recovery” have increased because of China’s expansion and signs that other economies are stabilizing.

As evidence mounts that the worst of Europe’s recession has passed, Dutch Finance Minister Wouter Bos said today that policy makers should start thinking about how to unwind government stimulus measures. Other ministers joined calls from the International Monetary Fund’s No. 2 official, John Lipsky, for the exit to be coordinated.

Exit Strategies

German Finance Minister Peer Steinbrueck, absent from today’s meeting in Brussels, told his counterparts in a letter last month that failure to align exit strategies risked “distortions of competition,” after governments extended more than $2 trillion in fiscal packages and help for banks such as Citigroup Inc. and Royal Bank of Scotland Group Plc.

“I think the exit strategy from this crisis should be coordinated at the European level and of course also at a global level. We will discuss this at the next G-20 in London,” EU Monetary Affairs Commissioner Joaquin Almunia said today.

Almunia and Borg said that while there were signs of improvement, the labor market would remain weak. Euro-region unemployment rose to 9.5 percent in July, a 10-year high.

“I cannot be optimistic for the next months,” Almunia said. “The figures are worrying.”

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the EU.

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