US, Europe close in on bonus compromise

America and Europe are edging towards a compromise plan to rein in bankers' bonuses at a summit of the world's 20 leading economies in Pittsburgh this week.

The build-up to the G20 meeting has been marred by differences between European countries, led by France and Germany, who want tough action to outlaw the huge bonus payments which contributed to the financial crisis - and America, which has been reluctant to go that far.

Britain has sided with the US in opposing the French President Nicolas Sarkozy's call for a cap on payments to individual bankers.

Senior British Government sources stressed yesterday that differences remained but they are increasingly optimistic that a deal can be struck. It is likely to involve regulatory bodies such as Britain's Financial Services Authority "auditing" banks and, where necessary, ordering them to pay less in bonuses and salaries so they can build up their reserve kitties to get them through a future crisis.

Britain is unlikely to agree that a fixed percentage of profits should go on bonuses. But officials in London believe that allowing national regulators to intervene would "kill two birds with one stone" - reducing excessive risk-taking by banks and meeting the public and political clamour for a crackdown on bonuses.

The G20 leaders are expected to call for rewards to be based on long-term performance, a move which could see bonuses "clawed back" after a few years" if they were not deserved.

Gordon Brown will use the summit to propose a "new global compact" to prevent a repeat of the financial crisis. But he risks sparking a rift with China by joining President Barack Obama in a call for a "rebalancing" of the global economy.

The plan would recognise that US consumers could no longer be the engine for global growth and encourage China to spend rather than save its cash mountain. In return, China would win more clout on the International Monetary Fund, which would oversee the "rebalancing" and provide "insurance" to countries so they had less incentive to build up huge reserves for a future crisis.

A document outlining the US position at the G20 warned: "The world will face anaemic growth if adjustments in one part of the global economy are not matched by offsetting adjustments in other parts."

President Obama said on Monday: "We can't go back to the era where the Chinese or the Germans or other countries are just selling everything to us, we're taking out a bunch of credit card debt or home equity loans, but we're not selling anything to them."

China has been under pressure from the West for years to ensure that its huge population spends more abroad. Gaps between savings and investment rates among different nations were one cause of the global recession, as huge trade surpluses and currency reserves were built up by exporters like China, while there were big deficits in the US and other economies.

But China insists this was not the root cause of the crisis, blaming risky behaviour in the financial world.

Yesterday, Brown said he believed there was strong support among world leaders for a "global compact for growth and jobs". He predicted there would be no early end to the US$1 trillion ($1.4 trillion) "fiscal stimulus" package agreed at the last G20 summit in London in April, saying it would continue for at least another year.

"The stimulus that we have still got to give the world economy is greater than the stimulus we have already had, so I would say that over the next 15 months you will see America's stimulus higher than it was in the last few months because that is how it is projected to develop, Germany's stimulus next year is higher than this year," he said.

"What we want to do is safeguard a recovery from a recession we feared would develop into a depression."

The timing of the withdrawal of the fiscal stimulus package as the global economy recovers will be a key issue at this week's summit.

The British Prime Minister believes it is essential that any action is carefully co-ordinated at the international level to ensure that the still fragile world economy does not plunge back into a double-dip recession. But Germany and France may call for a swifter "exit strategy" now that their economies have started to grow again.

Brown's success in chairing the London summit was called into question yesterday by aid groups. A study by ActionAid found that only half the US$50 billion promised in London for the world's poorest nations has been delivered so far.

Claire Melamed, head of policy at ActionAid, said: "The inconvenient truth is that the IMF has budget tightening hardwired into its DNA. Unlike in rich countries, where fiscal stimulus was the order of the day, most of the countries going to the IMF have been asked to agree to limits on their spending and borrowing.

"The risk now is that help for poor people will be sacrificed in favour of balancing the books."

GROUP OF TWENTY
* The G20 is is an economic forum consisting of 19 of the world's national economies, plus the European Union.
* The G20 leaders are meeting in Pittsburgh, Pennsylvania, for a two-day summit starting on Friday.
* The members of the G20 are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States, and the European Union.

- INDEPENDENT