On 2 April the leaders of the G20 met to discuss the best way of handling the financial crisis. The headline announcement from the summit was that there would be an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy.
Rescue package breakdown
Consensus on measures to ensure the flow of capital was acknowledged as critical to “global confidence and recovery”. It’s a sign of the times perhaps when the trillion dollar rescue package proposed at the G20 summit no longer holds us in such awe. Perhaps because it quickly became clear that the eye watering package was not quite what it first appeared. Most of the rescue package proposed comprises amounts committed prior to the summit and “contingent liability” amounts (amounts that won’t be called on unless a state actually defaults on a loan from the IMF). So how did twenty world leaders get to $1.1 trillion?
- There is a pledge of $500 billion to boost IMF funds and to help with loans to member states as needed. Part of these funds were committed prior to the summit ($75 billion from the EU, $100 billion from Japan) and $250 billion of the headline figure is a pledge of future funds which will only need to be raised as required. The IMF will also expect, subject to one or two exceptions, to be repaid with interest for any loans made to member states from this fund. Significantly part of the pledge includes $40 billion of “new money” from China which can only add strength to China’s contention that the time has come for a change in the balance of power in the structure of the IMF which is currently dominated by the EU and the US.
- There is a “new” trade finance initiative of $250 billion. Less than one tenth of this amount though will be supporting “new” trade finance. The majority of the finance is apparently being directed to prop up trade flows already in existence. In practice, it will also be hoped that the majority of instruments, by way of guarantee or other form of support, will not need to be called on. Significantly, the private sector has been called on to play a “significant co-financing role” on the trade initiative next to the International Finance Corporation. Standard Chartered was “first past the post” pledging $750m on the day of the summit.
- There is $100 billion in aid for the world’s poorer countries which, interestingly, is to be raised from the capital markets. There is also an agreement that additional resources from sales of IMF gold will be used, together with surplus income, to provide $6 billion additional flexible finance for the poorest countries over the next 2 to 3 years which has led to a frenzy of speculation about IMF gold reserves and gold pricing both in the stock markets and the press.
- The most radical part of the finance package is by general consensus the power given to the IMF to issue currency up to $250 billion to allow for quick injections of large amounts of cash into the global markets. Member states will be able to cash in on the currency of their choice in exchange for their IMF paper currency (SDR1) allowance based on their IMF quotas. In other words member states now have access to the world’s most impressive “hole in the wall” machine from which they can make free cash withdrawals subject to any limits on their membership account. Speculation is rife as to whether these are short term emergency measures or whether this is a first tentative but considered step towards a global currency and a new more prominent role for the IMF as the “lender of last resort”2.
Global regulatory framework proposals
Financial supervision and regulation were also key items on the agenda. The communiqué is quite clear that confidence will not be restored until action is taken to rebuild trust in the financial system.
The communiqué also underlines the need for greater consistency and systematic cooperation between countries and a framework of internationally agreed high standards. Strengthened regulation and supervision are deemed necessary to promote propriety, integrity and transparency and to guard against risk across the financial system.
This all sounds fine but how is this to be achieved? The communiqué lists nine key action points:
- A new Financial Stability Board (FSB) would succeed the Financial Stability Forum (FSF) and have a stronger mandate and include all G20 countries, FSF members, Spain and the European Commission.
- The FSB and the International Monetary Fund will collaborate and provide early warning on macro-economic and financial risks.
- Governments will reshape their regulatory systems so that national regulators may identify and take into account macro-prudential risks.
- Regulation will be extended to all systemically important financial institutions, instruments and markets (this includes systemically important hedge funds).
- The FSF’s new principles on pay and compensation will be implemented.
- There should be regulation to prevent excessive leverage and buffers of resources to be built up in good times.
- Action to be taken against non-cooperative jurisdictions, including tax havens. According to the communiqué the “era of banking secrecy is over.”
- Accounting standard setters should work with regulators and improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards.
- Registration and regulatory oversight should be extended to credit rating agencies.
Many of the above initiatives have already been mentioned in the de Larosière report and the Turner Review. Therefore it might be argued that an international regulatory consensus is developing. However, the question is how long the consensus will last before national self interest takes over and pledges in the communiqué about avoiding protectionism are forgotten.