G20 edges towards deal to rein in bankers' bonuses

Britain aligns with US as Germany and France dig in over bonuses for bankers
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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 later 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 (IMF), 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 yesterday: "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. Last night, Mr 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 $1trillion "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 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.

Mr 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 $50bn promised in London for the world's poorest nations has been delivered so far.

Dr 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, which seems doubly unfair at a time when trillions are being spent on propping up banks."

Diary overload Gordon Brown's hectic week

Tuesday 22 Mr Brown flies to New York for the annual United Nations General Assembly, a gathering of 192 countries. He will co-chair a climate-change debate about how much industrialised nations should pay to help developing countries switch to low-carbon economies. This is a potential stumbling block to a new global deal in Copenhagen in December.

Opportunity rating (out of five): 2. A critical issue

Danger rating: 3. No breakthrough likely until Copenhagen

Wednesday 23 The Prime Minister does not want a one-to-one meeting with the Libyan leader Colonel Muammar Gaddafi, who is scheduled to address the assembly. This will turn the media spotlight back on the release of the Lockerbie bomber, Abdelbaset Ali al-Megrahi, just when Mr Brown had hoped it had moved on. Colonel Gaddafi ignored his plea for Megrahi not to be given a hero's welcome in Tripoli. However, the Prime Minister may not be able to avoid another "grip and grin" handshake for the cameras.

Opportunity rating: 2. Not much to be gained in current climate

Danger rating: 4. Colonel Gaddafi remains unpredictable

Mr Brown will speak to the UN General Assembly. The media will be looking for any sign of tension with Barack Obama over al-Megrahi, whose release the US condemned because 189 of the 270 people who died in the 1988 bombing were American. Mr Brown will be keen to show that the Anglo-American "special relationship" is still intact, but will not get a one-to-one meeting with the US President.

Opportunity rating: 3. Other issues (global economy, Afghanistan, Middle East peace) should take priority

Danger rating: 2. Lockerbie still a sensitive issue for US

Mr Brown will unveil his latest initiative to help the world's poor – free healthcare for tens of millions of people who currently pay "user fees", including pregnant women, young mothers and children. The move is designed to tackle maternal and child mortality.

Opportunity rating: 2. Important but may not be main event

Danger rating: 4. Mr Obama may be reluctant to engage when battling over US health system

Thursday 24 Mr Brown will sit at the same UN Security Council table as Col Gadaffi to discuss nuclear proliferation – just the Prime Minister's luck that Libya is one of the council's 10 rotating members. It is another photo-opportunity he will have to grin and bear. Mr Brown will then fly to Pittsburgh for a working dinner with G20 leaders. He will hope to shape their discussions after winning plaudits for saving the banks in the financial crisis and chairing a successful G20 summit in London in April. The Prime Minister will call for an ambitious "new global compact to entrench economic recovery and secure stability, growth and jobs".

Opportunity rating: 2. Mr Brown will be taken seriously

Danger rating: 3. It will be Mr Obama's show; a new "compact" will not be agreed overnight

Friday 25 The G20 summit will decide how long governments should maintain a fiscal stimulus as economic growth resumes; how to regulate bankers' bonuses and reforms to bodies like the International Monetary Fund. Mr Brown will call for spending by governments to continue next year to prevent a double-dip recession. But Germany and France may push for a swifter "exit strategy". Mr Brown could find himself allied with Mr Obama against President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany. The G20's verdict could also have implications for Britain: the Tories want to cut public spending now, but Mr Brown would like to claim they are isolated internationally.

Opportunity rating: 3. Mr Brown will claim victory, but so will everyone else after a compromise

Danger rating: 2. Talk of exit strategies will be seized on by the Tories

Saturday 26 Mr Brown will arrive at Heathrow and be driven straight to Brighton for the Labour Party conference, a critical week in his efforts to fight back against the Tories. He must also prepare for an interview with Andrew Marr on Sunday morning and finalise his all-important speech.

Opportunity rating: 3. Good platform for a relaunch

Danger rating: 2. Labour Party should rally behind him – for now