Rethinking Bretton Woods | Thu, Jul 1, 2010
RBW Director Aldo Caliari assesses the outcomes of the Group of 20 Summit in Toronto (June 26-27, 2010).
The Group of 20 (G20) held its Summit in Toronto on June 26-27. Coming as the first Summit after the G20 decided, in Pittsburgh, that the G20 would become their “premier forum for international economic cooperation,” expectation levels were high.
Yet, the best summary of the meeting is perhaps to say, in a metaphor that fits these Soccer World Cup times, that the G20 chose to kick the ball forward.
A look at the Summit Declaration reveals, almost in systematic fashion, a repetition of language agreed in Pittsburgh and a remarkable number of references to the (G20) Seoul Summit, scheduled for November, as the place where they are supposed to be resolved.
Fiscal consolidation versus expansion of demand
The issue that reportedly topped the agenda was the choice between fiscal retrenchment and expansion of demand that many countries face in the aftermath of the crisis.
One of the instances often invoked to exemplify the G20 leadership are the coordinated actions for fiscal and monetary stimulus undertaken to stem the 2008-09 crisis. But the recent problems in the Eurozone countries, which have prompted many countries in the region to announce tough austerity plans, imposed a sense that the day to decide on “exit strategies” had come sooner than expected, and coordinated decisions had to be made.
The debate showed, however, very divergent views on the urgency of unwinding stimuli. Some countries were adamant that fiscal consolidation should take place while others –especially emerging market countries— held the view that fiscal retrenchment would only make matters worse. The final communiqué papers over the disagreement with a call to “put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances.”
Bank capital requirements
The language on bank capital requirements also repeated the Pittsburgh pledge of adopting Basel II in all major centers by 2011 with new standards being phased in “with the aim” of implementation by 2012. The “Basel II” is, in fact, what analysts have already begun calling Basel III, as it would include new proposals on strengthening the quality and quantity of bank capital, liquidity requirements, and potentially also a leverage ratio as supplementary to capital measured as a ratio of risk-weighted assets in the current Basel framework.
The fact that the target was end-2010 hides the difficulties that have emerged in the process of reaching such consensus on capital standards. The Eurozone crisis has placed stronger constraints on European banks, who were set to be more strongly challenged in adapting capital structures to the new requirements.
The Summit also gave a positive welcome to the “strong financial regulatory reform bill in the United States.” If only. Without denial the passage of a reform bill is a very positive achievement that could not have been taken for granted at any point since the crisis—in fact, even further concessions are being granted to make its passage possible as this article is written.
But, just like the G20 in Toronto, the bill also did a lot of forward-kicking. Provisions to ban risky investments with depositors’ funds by federally insured banks, got downgraded to provisions that allow banks to keep owning hedge and private equity units and to also make investments with their capital to hedge banks’ risks or facilitate clients’ needs, up to a three percent of capital. The phase-in time for such measures is seven years. Provisions to bring derivatives to exchange platforms with central clearinghouses are also not to affect existing contracts, which are “grandfathered” in the legislation. Most importantly, there are around 200 measures that leave implementation to regulators. For such measures, the regulatory action will depend on the regulator and financial firms’ lobbyists will undoubtedly seek to ensure that is the most lax possible outcome.
Systemically important financial institutions
Limited action was also seen with regards to “too big to fail” institutions and their potential cost to taxpayers. The Financial Stability Board delivered a report on reducing moral hazard risks posed by “systemically important” financial institutions. The declaration from the Summit however limited itself to welcome the report and call for more work on concrete policy recommendations that should happen before the Seoul Summit.
The Communique also referred to the magical deadline of end 2010 for continued work on “robust, agreed-upon institution –specific recovery and rapid resolution plans for major cross-border institutions.” But it is unlikely that these plans now could, in terms of mechanisms and tools to utilize, go beyond what US legislation has established, especially since so many of the targeted institutions are based in the US.
Since the crisis, the U.S. largest 25 institutions went from 56 % of total bank assets to 59 %. Against this backdrop, the coming legislation does not leave much room for comfort. In a recent survey of economists carried by the Wall Street Journal, by a margin of 37-7 respondents agreed that the legislation rather than solving the “too big to fail” problem, institutionalizes it.
Financial transaction taxes
Efforts launched in Pittsburgh to ensure the financial sector pays a “fair and substantial contribution towards… the burdens associated with government interventions” were also stalled. The promising process launched last year had seen disagreements between those countries—especially the host, Canada—that did not want to see any type of taxes on the financial sector and those that, like European countries, promoted more than one such measure at the same time—e.g. a bank levy on the balance sheet of the firms and a tax on financial transactions.
The language in the communiqué recognizes that to that end “there is a range of policy approaches,” ruling out any consistent support or encouragement to the introduction of any particular one.
A much-debated and awaited report the G20 had commissioned to the IMF, and one of whose highlights was to assert the feasibility of financial transaction taxes, was merely thanked in the Declaration. It had been rumored before the Summit that the report would not even be made public.
Trade and investment
The G20 Leaders extended until 2013 their commitment to refrain from raising barriers or impose new barriers to investment or trade in goods and services. The World Trade Organization, UNCTAD and the OECD were asked to continue monitoring the situation quarterly. Their latest report, however, released just before the Toronto meeting, showed a continuation of the post-crisis pattern whereby countries implement trade restrictions. While the report found a lower number of new restrictions in this particular period, it also expressed concern about the accumulation and non-removal of previous ones.
A Development Working Group
One outcome to watch out of the Toronto Summit was the creation—reportedly an initiative spearheaded by Germany and South Korea-- of a Development Working Group. The Working Group is to be chaired by South Korea and South Africa and has a mandate to produce “a development agenda and multi-year action plans to be adopted at the Seoul Summit.”
In the same weekend of the G20, the Group of 8 was denounced worldwide for dropping its commitment to double aid to Africa by 2010. As loyal G8-watchers will remember, that promise formulated in 2005 was the substance that made headlines back then. With this troubled legacy, it is inevitable that the G20 initiative carries a heavy burden of proof about its worth.
Framework for Balanced Growth
Action was also expected on the “Framework for Strong, Sustainable and Balanced Growth” that the G20 launched in Pittsburgh. At the core of this initiative was the effort to redistribute surpluses and deficits in the current accounts of major economies, which in turn demanded changes to unsustainable growth models prevailing before the crisis hit.
Indeed, the immediate impacts of the 2008-09 crisis on world trade and consumption was a reduction in global imbalances. The incipient recovery this year not only has seen imbalanced patterns pick up again, but the devaluation of the Euro threatens to add large surpluses in the Eurozone –hitherto, as a whole, not a big accumulator of either deficits or surpluses— to those that will have to be balanced with deficits elsewhere.
The G20 exercise is proving so far no more fruitful than previous attempts in the context of the IMF –e.g. the multilateral consultations on surveillance, launched in 2006—to address the problem.
Perhaps, with two G20 Summits a year, expecting both of them to be eventful is holding the bar too high. On the other hand, the failure to make any significant progress in Toronto certainly raises the stakes for outcomes at Seoul.
G20 Summitry is still in its infancy and only time can tell how much G20 Summits can get done. But it is inevitable that G20 Summitry will have to improve its capacity to deliver results if it wants to generate any credibility as a forum. Much more if this is credibility as a “premier forum for international economic cooperation.”
After all, nobody is interested in watching a soccer game where no goals are expected to be scored.