Pessimism spreads as G20 leaders show sharp split

A strong sense of pessimism shrouded the start of an economic summit of rich and emerging economies Thursday, with US President Barack Obama and fellow world leaders arriving in Seoul sharply divided over currency and trade policies.

The Group of 20 summit, held for the first time in Asia, has become the centerpiece of international efforts to revive the global economy and prevent future financial meltdowns.

Failure in Seoul could have severe consequences.

The risk is that countries would try to keep their currencies artificially low to give their exporters a competitive edge in global markets.

That could lead to a destructive trade war. Countries might throw up barriers to imports - a repeat of policies that worsened the Great Depression.

Hopes had been high that the Group of 20 could be the world forum for hashing out an economic way forward from financial crisis.

But agreement appeared elusive as the summit began, divided between those, such as United States, that want to get China to allow its currency rise, and those irate over US Federal Reserve plans to pump US$600 billion of new money into the sluggish American economy, effectively devaluing the dollar.

Obama warned that the US could not continue to be the world's consumer.

Bankruptcy worldwide

Brazil's President Luiz Inacio Lula da Silva warned that such policies would "bankrupt" the world.

"If the rich countries are not consuming and want to grow their economy on exports, the world goes bankrupt because there would be no one to buy," he told reporters. "Everybody would like to sell."

A US proposal to limit current account surpluses and deficits to 4 per cent of gross domestic product as a way to reduce trade gaps has also met with opposition.

"Targets are neither econo-mically appropriate or appropriate from a financial perspective," German Chancellor Angela Merkel said.

"Current account balances are hard to target. What's important is that we don't resort to protectionist measures."

Germany is the world's second-biggest exporter after China.

British Prime Minister David Cameron said nations with large budget deficits have a respon-sibility to deal with them.

Concerns about trade gaps, protectionism and a currency war threatened to overtake momentum for forming global solutions to the financial crisis created at last year's London summit.

No success

So far, officials can't even agree on the agenda, much less a draft statement.

Government ministers and senior G20 officials have laboured for days without success to come up with a substantive joint statement to be issued today, G20 summit spokesman Kim Yoon-kyung said.

Delegations will be working all night, officials from three countries said. One, speaking on condition of anonymity because of the sensitivity of the matter, said he doubted they'd reach agreement by morning.

"The stand-off between the G20 countries is so obvious that even the financial markets are having to acknowledge that this is very damaging for sentiment," said Stephen Lewis, chief economist for London-based Monument Securities.

At best, leaders will "probably come up with a statement indicating that it's good for the IMF to monitor what the G20 countries are doing to reduce imbalances," he said. "But I doubt they'll go much further."

Neil MacKinnon, global macro strategist at VTB Capital, said early indications for substantive policies to address global imbalances "do not look promising".

Leaders had a working dinner Thursday at Seoul's grand National Museum of Korea, greeted by sentries dressed in royal garb and escorted by children in traditional Korean dress.

Outside, a few thousand protesters rallied against the G20 and the South Korean government. Some scuffled with riot police, but the march from Seoul's main train station was largely peaceful.

"We can put people watching this summit at ease by reaching a concrete agreement that takes a step forward," South Korean President Lee Myung-bak said. "You, world leaders, know that our global economy can achieve a continuous, balanced growth with international solidarity."

However, his failure to announce that he and Obama, among the staunchest of allies at the summit, had agreed on a long-stalled free trade accord as expected did not bode well for the mood for compromise.

- AP