G20 statement – many words, little meat
G20 meeting produced a statement .
This declaration identifies the root causes of the crisis:
“During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.”
It is a rare event indeed, that developed countries policymakers say openly “we screwed up and we are sorry”. So we need to congratulate them on this part. Then come solutions and actions to be taken.
I list some important recommendations below:
- incentives should be created to avoid excessive risk taking
- strengthen regulatory regimes
- ensure that ALL participants and ALL products are regulated
- make regulation counter-cyclical
- deal with non-cooperative jurisdictions (including homes banks offering to secret accounts)
- reform Bretton Woods institutions, give greater voice to developing countries
- broaden the Financial Stability Forum membership
Adopted action plan, to be implemented by G20 finance ministers in cooperation with the IMF, important parts are below:
- improve accounting standards, create unified best practices
- create single, high quality global accounting standard
- by 31 March 2009 propose recommendations that mitigate pro-cyclicality of financial regulation
- all G20 members will undertake FSAP review
- definition of capital adequacy should be harmonized
- regulators should review rating agencies adoption of standards
- enhance OTC electronic markets for CDS contracts, force market participamts to support OTC market
- improve risk management and reporting, Basle Committee should develop new stress testing models
- standard setting bodies should react faster to financial innovation
- improve tax information exchange
- regulators should strengthen cross-border crisis management skills
- IMF should take a leading role in drawing lessons from the crisis
- IMF should get more funds
- IMF vote and quota should be changed to give emerging markets more influence
On other issues leaders stated their commitment to deal with other issues (energy security, global warming, food security, poverty, …)
Leaders stated that they will refrain from raising new barriers to investment and trading in goods and services.
The next G20 meeting will take place again by 30 April 2009.
* * *
Now few comments of mine.
There is nothing new or unexpected in the statement. There is no new money committed, G20 just says that IMF, WB and other multilateral banks resources will be review and countries stand ready to increase them. To get the numbers right recall that IMF firing power is 250bn dollars, while developed countries have already allocated some 9 trillion dollars to crisis fighting (governments 7tr – including guarantees, as estimated by the Bank of England in recent financial stability report ) and 2tr in central bank lending against dodgy collateral). In other words there are a lot of words and no meat in the statement, so markets may be disappointed, but lets see what will be the opening in Asia on Monday.
The statement presents worries that emerging markets may be shut off from foreign funding. It is worth remembering that Robert Lucas Jr. has already identified a puzzle (called Lucas puzzle after him) that capital flow from emerging markets to developed markets, against the economic theory. Since Lucas paper this trend intensified massively. So the real problem does not lie with the US and European banks and funds that would stop lending to emerging markets and buying their shares, the real problem is that emerging markets financial institutions should stop buying US debt and should
invest much more in the emerging markets as a group. So the top priority should be creating deep and liquid markets in Asia and in the Gulf, that would provide excellent market infrastructure, top corporate governance standards and legal protection. Statement is silent on this aspect of solving the crisis.
Finally, I am of the opinion, that if you have something very important to say, and the whole financial world is waiting, you should say it on one page in a plain language. When business people adopt the action plan, the give precise framework and set performance measures, so that you know whether the plan implementation goes well. When politicians create action plan, it is in a fuzzy language over a hazy horizon. Then they can go home and every leader can interpret the statement in his/her homeland in line with local political needs. I am not sure we have time for this standard political communication in crisis times.
7 responses to "G20 statement – many words, little meat"
I’m not too keen to comment on your comment on G20 (I like bbc comment much more/ but nevertheless i’d like to take the opportunity to remind you your infamous entry from may ‘08 praising your own forecasts for this year (”My 2008 f’casts revisited”)….when I read them at the time I couldnt stop thinking “this guy is just like a moth that flies to the fire repeatedly”. Any thoughts on that? (your hit ratio stands at 2/12 with 6 weeks left till the end of the year…)
Indeed it is unlikely that oil will go to 200 within next few weeks. The forecast was made in December 2007, and I do look back each year at what my thoughts about economy were year before, I am planning to write about it in December. Anyway, fundamental story is correct (as confirmed by IEA WEO report released few days ago (summary is in resources on this blog).
http://www.rybinski.eu/resources/non-modules.d/dispatcher/dispatch.php?id=2356
Oil will go to 200, or possibly beyond once this far-sigma shock is over (I assume it will last two years, that is average length of recession following banking crisis), as calculated by the IMF in October WEO. In other words, fundamental processes were interrupted by large shock, and I do not predict shocks, as it cannot be done with large success over long time periods.
I think that I am doing better than 2/12, but it is subjective assessment.
One more thought.
Somehow in Poland we get very emotional when talking about economics, instead of arguments we use logos (neo-liberal, monetarist, Keynesian, moth, …). I hope that one day, some day our economic debate will look similar to what you can see in UK or US.
I have an impression that objectives declared by G20 are long-term, despite calling them short and mid-term ones. If realized they should have a positive impact on markets and protect them from next crises. They are not addressed, however, at resolving current crises, which actually somehow has not surprised me.
Let me ask you a question concerning what you mean by creation of deep and liquid markets in Asia. I have an impression that some of the actions declared by G20 (unification of accounting and capital adequacy standards, support for emerging markets in introduction of new standards) are aimed at improving market transparency. This, in my opinion, might inmprove institutional environment, which should be particulalrly helpful for emergin markets, even though results cannot be expected to appear soon.
I fully agree, it will take years to agree world common accounting standards and to make sure that US, Europe and China use the same standards for bank capital f.ex.
This declaration is similar to the outcomes of multilateral consultations held by IMF to solve global imbalances in Nov 2006. The communique also declared that certain actions will be taken, and few months later US completely departed from agreed action plan.
I think that China/Korea/Japan plus ASEAN do not need IMF assistance to create large, liquid bond market in Asia, they have enough skill and more than enough capital to do it. And try to go to Indonesia and yell I am from the IMF on the street of Jakarta, you will be stoned to death. With such history and Washington-consensus track record IMF will not be very helpful in Asia.
Mr Rybinski, on http://www.dziennik.pl You promised to provide info about euro, NBP and ECB, it`s supposed to be on this blog, yet i have troubles to locate it, can You help me?
Regarding the G20 meeting: don`t You think the markets are regulated enough? How do You think further regulations would look like? I think FED, ECB and other central banks are the biggest regulators and are responsible for the crisis by keeping the rates too low and creating “bubbles” (yes, i`m an austrian). Can the fiat currency supply keep on growing?
you’re right about the emotional side of arguing in Poland (”moth” designate wasnt meant to be personal – as a long time follower of your writings and f’casting somehow i felt i cld use it to point out to one of seven sins of asset management industry – i.e. forecasting…..(btw: great piece by James Montier from DRkW whish i recommend for spare time reading). When I read your note at that time praising the f’casts I cldnt stop thinking: how can you praise the end of the day b’fore the sunset?
Leave a reply