G7 financial leaders focus on budget crises

A crisis in Europe over budget belt-tightening has upended global markets and seized the attention of financial leaders meeting in the Canadian Arctic.

Finance ministers and central bankers from the Group of Seven major industrial countries also planned to try to settle differences Saturday on banking industry changes. There are fears that go-it-alone action such as President Barack Obama's plan to break up big banks will further hamper the world's fledging economic recovery.

Canadian Finance Minister Jim Flaherty hoped his choice of the remote town of Iqaluit, population 7,000, where temperatures can dip to 40 degrees below zero in February, would make officials focus on the task ahead.

The US was represented by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke. The G7 consists of the US, Japan, Germany, Britain, France, Italy and Canada.

The agenda today included developments in the global economy, banking reform and proposals for more debt relief for Haiti as it recovers from a devastating earthquake.

The situation in Europe provided a sobering reminder that G7 policymakers still face major hurdles in repairing a broken global economy.

The Portuguese parliament's defeat of a government austerity plan on Friday triggered renewed concerns that it and other eurozone countries such as Greece and Spain were having trouble tightening controls to manage their budget deficits. That could threaten the economic recovery in Europe.

Stocks fell in Asia and Europe, while the Dow Jones industrial average clawed back to a small gain after suffering the largest single-day drop in seven months, on worries about the global economy.

"I think we have to be very mindful of the failure or potential failure of domestic economies," Flaherty told reporters.

On banking reform, the other G7 countries were expected to press Geithner to explain the announcement by Obama last month that the US would seek tougher rules to prevent risky actions by big banks from toppling the entire financial system.

Chancellor Alistair Darling has led calls for more co-ordinated action. He has said the US proposal does not address the biggest threat - the links between banks that can quickly transmit loan troubles at one institution to the entire system.

Flaherty said G7 countries agreed on the need to continue with government stimulus programs to prevent the world from plunging back into recession. But Germany and France have expressed concern about how long stimulus aid should be maintained. They worry about soaring budget deficits and the risk of inflation.

Obama presented a budget plan this past week that would boost job-creation efforts and raise the US budget deficit to a record 1.56 trillion dollars this year. Prime Minister Gordon Brown is also stressing government stimulus even though critics point out that the country's budget deficit as a share of its gross domestic product could reach 12% this year.

In Japan, where the economy has struggled for two decades, the government unveiled more stimulus spending last week.