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G8 Focuses On Economic...

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"While there are signs of stabilisation, including recovery in stock markets (...) the situation remains uncertain and significant risks remain to economic and financial stability," says a draft statement prepared for issue by leaders of the G8 industrial powers, a copy of which was obtained by Reuters.

The leaders, who headed to the earthquake-hit mountain town of L'Aquila on Wednesday for talks that start with the economy, will say they are committed to withdrawing stimulus spending, but only when the economy really looks safe.

"We agreed on the need to prepare appropriate strategies for unwinding extraordinary measures once the recovery is assured," the draft statement says. "Exit strategies will vary depending on economic conditions and public finances."

Stimulus Still Focus

Economists said that renewed market concern about recovery prospects in recent weeks meant it made sense to keep efforts to ensure the economy rebounds at the top of the agenda.

"In the last two or three weeks there's been a bit of a reality check and it's perfectly sensible for leaders to state that idea," Gavin Friend, a strategist at National Australia Bank in London, said.

Heading into the Italy meetings, officials said Germany's Angela Merkel would again press other leaders to stress their commitment to rapid restoration of healthy public finances once the storm passes.

But the United States, Britain, Japan and France wanted to keep the focus more firmly on recovery efforts for now, the official said. The wording of the statement reflected Washington's line at a summit of finance ministers last month.

The G8 powers -- the United States, Japan, Germany, France, Britain, Italy, Canada and Russia -- were expected to issue the statement after several hours of talks on Wednesday afternoon.

Leaders of another group of emerging market countries known as the G5 -- mostly importantly comprising China, India and Brazil -- were due to meet in parallel and on Thursday join the G8 leaders for further talks and to issue another statement.

No Currency Conclusions

The draft G8 statement, plus the one prepared for issue on Thursday after talks among G8 and G5 leaders, made no direct mention of currencies.

The meetings were being closely watched by some in financial markets because China had asked for a debate on global reserve currencies, arguing there should be a shift over time away from a global financial system dependent solely on the U.S. dollar in that regard.

"Stable and sustainable long-term growth will require a smooth unwinding of the existing imbalances in current accounts," the draft said.

Chinese President Hu Jintao pulled out of the talks at the last minute because of unrest in northwestern China in which 156 people have been killed.

Takao Hattori, senior investment strategist at Mitsubishi UFJ Securities, said the prospect of talks about the dollar had made markets nervous but news that there appeared to be no reference to the matter in statements removed that worry.

News last week that China was pushing for a debate knocked the dollar by a cent versus the euro at one stage, but National Australia Bank's Friend said the "event risk" now appeared to have dissipated.

On the economy, governments worldwide have committed an estimated $5 trillion dollars in public funds to stabilise the banking system and stimultate demand with costly infrastrcuture building projects and tax breaks.

There have been some signs since March of improvement in a number of economic indicators but jobless rates are soaring and governments are still wary of the risk of relapse.

The Organisation for Economic Co-operation and Development raised its economic forecasts on June 24 for the first time in two years, predicting 4.1 percent GDP contraction in the 30 mostly industrialised countries of the OECD as a whole rather than the 4.3 percent previously envisaged. It forecast a minor 0.7 percent rise in GDP next year instead of further dip.

(Reuters)