G-20 Calls for Action on Growth, Overhaul of Financial Rules

Date: Monday, November 17, 2008
Author: Michael McKee and Simon Kennedy, Bloomberg.com

Leaders from the biggest developed and emerging nations agreed to further steps to shore up a global economy sliding into recession, and laid out regulatory proposals to prevent a recurrence of the financial crisis.

The Group of 20 yesterday urged a ``broader policy response,'' citing the potential for additional interest-rate cuts and fiscal stimulus, in a statement after meeting in Washington. The group set a March deadline for recommendations on strengthening accounting standards, derivatives markets and oversight of hedge funds and debt-rating companies.

The call for an overhaul of the world financial industry indicates leaders want future expansions to be smoother than the boom and bust of this decade. A lack of any specific pledges to stimulate growth may disappoint some investors, analysts said.

``This isn't a strong action statement on addressing the matters at hand,'' said Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York. Markets may be vulnerable after the weekend meeting because there was no clear pledge for coordinated tax and interest-rate cuts, he said.

Rather than take the same steps together, nations should act ``as deemed appropriate to domestic conditions,'' the leaders said in their statement.

The group pledged not to erect new trade barriers, guaranteed more resources for the International Monetary Fund if needed and promised to meet again before May.

`Clear Determination'

``There was a common understanding that all of us should promote a pro-growth economic policy,'' U.S. President George W. Bush said. U.K. Prime Minister Gordon Brown said ``there is a clear determination on the part of world leaders in every continent to take necessary action to move economies out of this difficult period.''

Tumbling stock markets and forecasts for a worldwide recession are intensifying pressure on the G-20 leaders to act, 15 months after the credit crunch began. The IMF predicts advanced economies will together contract next year for the first time since World War II.

Writedowns and losses totaling $964.6 billion at financial institutions have triggered a surge in the cost of credit, cutting off access to capital for consumers and companies. The euro-area fell into its first recession in 15 years in the third quarter and data suggests the U.S., Japan and U.K. have as well.

China Shudders

Emerging markets are also feeling the pain, with Chinese industrial production growing at the weakest in seven years last month. The MSCI World Index of stocks is close to its lowest since 2003 and has fallen 45 percent this year.

The G-20 leaders, representing 90 percent of the world economy, blamed the crisis on investors who ``sought higher yields without an adequate appreciation of the risks.'' At the same time, the group faulted regulators in developed nations for failing to ``adequately appreciate and address the risks building up in financial markets.''

Reaching agreement on what to do was difficult, French President Nicolas Sarkozy said after the meeting. ``I'm a friend of the U.S. but it wasn't always easy,'' he said. ``There were misunderstandings to overcome.''

Sarkozy, who pushed Bush into convening the summit, and other European leaders want more government control -- reaching across international borders -- over lending practices and investing. Bush, with only two months left before he leaves office, opposes any movement toward a global authority overseeing financial markets.

Accommodating Differences

The statement papered over differences by recognizing that regulation is ``first and foremost'' a national responsibility, while at the same time demanding ``intensified international cooperation'' to oversee financial firms whose operations and problems cross national borders.

The leaders called for the creation of ``supervisory colleges'' for bank regulators around the world to better to coordinate oversight and share information about activities and risk-taking of international banks.

Capital standards should be raised, they said, particularly for banks' structured credit and securitization activities.

The leaders directed their finance ministers to work on recommendations for enhancing disclosure by investors and institutions, including hedge funds, of their financial conditions.

Debt-rating companies, which blessed many of the products that have since gone into default, should be registered, and oversight of their actions strengthened to ensure they provide unbiased information and avoid conflicts of interest.

Accounting Standards

Accounting standards should be harmonized around the world, the group said, and regulators should consider whether current rules properly value securities, particularly complex, illiquid products, during times of stress.

The leaders endorsed the use of clearinghouses for financial derivatives to back trades and absorb losses in case of a dealer failure. The first central clearinghouse for the $33 trillion credit-default swap market should be in operation by year-end in the U.S., under an agreement signed last week by three U.S. financial regulators.

Such products should be traded on exchanges or electronic trading platforms, the leaders said, and more disclosure should be required for other derivatives traded over the counter.

The leaders said executive compensation should be managed to ``avoid excessive risk-taking,'' while stopping short of calling for any caps.

Trade Talks

Warning against protectionism as a way to fight recession, the G-20 vowed not to raise any trade barriers for the next year. They also said they will seek ways by the end of the year to conclude the Doha round of trade talks that collapsed in July.

An accord ``would be a signal that would be of equal weight as an economic stimulus program,'' German Chancellor Angela Merkel said.

The governments will review the ``adequacy of resources'' at the IMF and World Bank, and look for ways to increase them, along with buttressing the role of smaller economies. Some emerging-market nations with large reserves have been reluctant to raise contributions to the IMF unless they are given more of a say in how the organization is run.

Leaders will meet again before the end of April, most likely in London, when a new American administration is in office. President-elect Barack Obama didn't attend the meeting, sending former Secretary of State Madeleine Albright and former Republican Representative Jim Leach to meet delegations instead.

Work Together

Obama ``asked us to represent him in receiving the views of these important partners,'' Albright and Leach said in a statement, adding that they held meetings with more than a dozen delegations. ``We also conveyed President-elect Obama's determination to continuing to work together on these challenges after he takes office in January.''

Heads of emerging-market nations said the G-20 should now replace the Group of Eight as the forum for addressing economic issues.

Brazilian President Luiz Inacio Lula da Silva said the G-8 has ``become a group of friends'' and there's ``no sense in making political and economic decisions without the G-20 countries.''

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

The Netherlands and Spain were also represented, as were the IMF, World Bank, Financial Stability Forum and United Nations.

To contact the reporter on this story: Michael McKee in Washington at mmckee@bloomberg.netSimon Kennedy in Washington at Skennedy4@bloomberg.net;