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Emerging market pain dominates G20 economy talks

European Council President Herman Van Rompuy (R) and European Commission President Jose Manuel Barroso arrive to take part in the G20 Summit
European Council President Herman Van Rompuy (R) and European Commission President Jose Manuel Barroso arrive to take part in the G20 Summit

By Tetsushi Kajimoto and Katya Golubkova

ST. PETERSBURG, Russia (Reuters) - Emerging and developed G20 powers struggled to find common ground on Thursday over the turmoil unleashed by the prospect of the United States reducing a flood of dollars to the world economy.

The Group of 20, which united in response to global crisis in 2009, now faces a U.S. economy picking up, Europe lagging and developing economies facing blowback from the looming 'taper' of the Federal Reserve's monetary stimulus.

"Our main task is returning the global economy towards steady and balanced growth. This task has unfortunately not been resolved," Russian President Vladimir Putin told leaders as they met at an annual summit in St. Petersburg.

Leaders signed off on a jobs and growth initiative, as well as steps to combat international tax evasion and tighten financial regulation. But concerns persisted that renewed market turbulence could hit developing economies hardest.

"Systemic risks, the conditions for an acute crisis relapse, persist," Putin said.

The summit was overshadowed by great-power tensions over the Syria crisis, with leaders addressing security matters over dinner after their traditional debate on a world economy that is doing slightly better than a year ago.

Departing from his prepared remarks, Putin avoided explicitly referring to risks arising from U.S. monetary policy. But the message from the BRICS caucus of emerging markets, which met earlier, was unmistakably aimed at Washington.

The BRICS announced they would commit $100 billion to a currency reserve pool that could help defend against a balance of payments crisis, although the mechanism will take some time yet to set up.

"The eventual normalization of monetary policies needs to be effectively and carefully calibrated and clearly communicated," Brazil, Russia, India, China and South Africa said in a joint statement.

That language reflected the text agreed by G20 finance ministers in Moscow in July. Russian Deputy Finance Minister Sergei Storchak said a passage on so-called "spillovers" would be unchanged in the closing summit communiqué.

A Japanese government official said that at finance ministers' talks over dinner, no countries were explicitly critical of the Fed although it was discussed at length.

Even among emerging powers there were sharp messages.

China and Russia said vulnerable countries, including G20 member India, will need to take steps to rebalance their economies, ruling out bailouts for countries that have hit trouble.

Washington, while playing up its contribution to growth, said emerging economies would have to do their homework as it dials back its expansive policy settings.

"Emerging economies, increasingly ... will have to look within their own borders for demand," Deputy National Security Adviser Ben Rhodes said.

MIND THE SPILLOVERS

Fed Chairman Ben Bernanke triggered a selloff in emerging market currencies, stocks and bonds and a flight to the dollar when he raised the possibility in May of reducing the Federal Reserve's $85 billion per month bond-buying program.

A first step may follow this month - a move amply justified by the state of U.S. recovery but with potentially huge implications for a global financial system that has come to depend on a cheap and abundant supply of dollars.

Advanced economies led by the United States will drive global growth while emerging countries are at risk of slowing due to tighter U.S. monetary policy, the International Monetary Fund warned in a pre-summit briefing paper.

China, often reticent on the international stage, urged Washington to be "mindful of the spillover effects and work to contribute to the stability of the global financial markets and the steady recovery of the global economy".

Deputy Finance Minister Zhu Guangyao pressed Europe to do more to revive economic growth, which has started to pick up after a sovereign debt crisis in the peripheral countries of the euro zone.

"The structural problems are far from solved and now is no time to be arrogant," Zhu told reporters.

Loose monetary policy must be adjusted step by step without causing economic disruptions, German Chancellor Angela Merkel said on the G20 sidelines, after the European Central Bank left policy on hold on Thursday.

DEBT COMMITMENTS

The high debt burden piled up by industrialized economies has also driven calls from some members of the G20 - which accounts for 90 percent of world output and two-thirds of its population - to get borrowing down.

"A common understanding of the necessity to find an optimal balance between fiscal consolidation and support of growth has emerged in hot discussions," said Putin, hinting at behind-the-scenes clashes.

Ideas about binding commitments to extend the Toronto debt reduction goals agreed at a summit hosted by Canada in 2010, sought by Germany first and foremost, have been abandoned.

Canadian Prime Minister Stephen Harper, a champion of the debt-reduction agenda, said he would nonetheless seek to balance his budget by 2015 as he seeks to boost investment and growth.

Japanese Prime Minister Shinzo Abe told the G20 that Tokyo aimed to achieve both economic growth and fiscal reforms with his pro-growth policy agenda, but made no mention of a planned doubling of the sales tax over the next two years.

Abe said Japan would pursue its aim of halving the budget deficit - excluding new bond sales and debt-servicing - by the fiscal year to March 2016 and achieving a surplus by March 2021.

"It is particularly important for Japan to achieve both economic growth and fiscal consolidation as our country's fiscal situation is more severe than other countries," Abe was quoted by a Japanese official as saying.

(Reporting by Lidia Kelly, Gernot Heller, Matt Spetalnick, Alessandra Prentice and Randall Palmer. Writing by Douglas Busvine, editing by Mike Peacock)

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