After a colossal build up to the Group of Twenty’s (G20) meeting in London today, the market has been placated with a nine-page statement that covers many of the concerns that leaders around the world have voiced during the ongoing economic and financial crisis. However, despite the sweeping vows and constructive language, there are still doubts as to how and when some of points covered will be addressed. Breaking the statement down, we will go over the various pledges the economic leaders have made and how the market will react to each.
‘Restoring Growth and Jobs’
- “We are undertaking an unprecedented and concerted fiscal expansion, which…by the end of next year [will] amount to $5 trillion [and] raise output by 4 percent…”
Market’s take: This is initially promising, but does not in itself suggest policy officials are allocating new resources to a global stimulus program. This is largely a tally of the cumulative, individual packages that have been previously announced.
- “…Our central banks have pledged to maintain expansionary policies for as long as needed…”
Market’s take: Many of the world’s largest economies have already had to lower their benchmark lending rates to the lowest levels in recent member out of necessity. This does not place any significant burden on policy makers to hold their lending rates at these low levels any longer than growth and inflation would warrant through natural market forces.
- “Today, we have further agreed over $1 trillion of additional resources for the world economy through our international financial institutions and trade finance.”
Market’s take: This is one of the more promising comments to come out of the statement. However, what are the resources. Does this pertain to short-term lending for liquidity or longer-term loans that can allow financial institutions to weather an extended crisis and economic slump? Just as important, when these resources be put to use?
- “We will…refrain from competitive devaluation of our currencies…”
Market’s take: One of the few, directly statements for currency traders to work with. Currency manipulation was a real concern as economies have used it as a tool in the past (most recently Switzerland who vowed to keep the franc from appreciating excessively against the euro). Without the fear of intervention, both the Swiss franc and Japanese yen become safe currencies to trade.
‘Strengthening Financial Supervision and Regulation’
- “In particular we agree to establish a new Financial Stability Board (FSB) with a strengthened mandate…”
Market’s take: This is the first step to a global regulatory body. Global accountability is not the immediate concern for the market (establishing confidence in lending and reviving growth is); so this point can take some time. However, it does offer a strong commitment to prevent another crisis later down the line.
- “…we agree to extend regulation and oversight to all systemically important financial institutions, instructions and markets…[including] systemically important hedge funds…”
Market’s take: This is a step that market participants had expected. This could lower liquidity, volatility and the threat of another crisis over the long-term by preventing excess leverage and risk taking.
- “...regulation must prevent excessive leverage and require buffers of resources to be built up in good times…”
Market’s take: The ongoing financial crisis began with a vapid loss of liquidity after banks and traders felt they couldn’t accurately price complex derivatives. With so much leverage built through these deals (and little collateral to back them), the market has been set on the long-term task of unwinding these positions and thereby keeping investor sentiment under pressure. As such, this is likely a policy that will have the greater influence after the current crisis is over – unless the new rules target outstanding positions, which could actually contribute to the problem.
- “we agree to extend regulatory oversight and registration to Credit Rating Agencies..”
Market’s take: Another prominent party to blame for the financial turmoil, credit rating agencies gave their approval on debt that was backed by little secure collateral and was further financial amplified through derivatives. Another inevitable change in policy.
'Strengthening our Global Financial Institutions'
- “We have…agreed today to make available an additional $850 billion of resources through the global financial institutions to support growth in emerging market and developing countries…”
Market’s take: A general policy made specific through agreements to “immediate” financing from members totaling $250 billion, an increased New Arrangements to Policy program to $500 billion, and an increase of at least $100 billion by the Multilateral Development Banks to low income countries. These are perhaps the most explicit steps to be addressed by the statement.
'Resisting Protectionism and Promoting Global Trade and Investment'
- “we reaffirm…to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.”
Market’s take: This is once again very general. What’s more, it is merely an extension on promises made in previous meetings.
- “we will ensure availability of at least $250 billion over the next two years to support trade finance through our export credit and investment agencies…”
Market’s take: This sets a specific monetary value on planned aid; but spread out over two years gives little confidence in timing. We have long seen the lack of confidence inspired by individual government bailouts that take too long to implement.
'Ensuring a Fair and Sustainable Recovery For All'
- “…the actions and decisions we have taken today will provide $50 billion to support social protection, boost trade and safeguard development in low income countries…”
Market’s take: Supporting the emerging market is vital to a recovery in global growth. The developing world’s dependency on their larger counterparts typically delays their own recovery and leads to deeper contractions. Ultimately, $50 billion is a modest some for the many developing nations; and it is still unclear of where these funds will come from as well as when they will be put to use.
- “..we have committed…that additional resources from agreed sales of IMF gold will be used, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years.”
Market’s take: This is perhaps the only policy which provides a source of income. However, this is once again a modest sum considering the breadth of the crisis; and over two to three years, it is thinned out even further.
'Delivering our Commitments'
- “We have committed ourselves to work together with urgency and determination to translate these words into action. We agreed to meet again before the end of this year to review progress of our commitments.”
Market’s take: A good summation of the entire meeting. Once again many commitments were made; but few details and timelines were made. Considering the complexity of establishing policy between 20, very different nations; there is little holding individual members to this plan should conditions worsen in their individual economies. Without publicized follow up involving a number of the G20 members going forward (and genuine capital to actually fund the fiscal programs mentioned throughout the statement) this summit may fail to produce true results – like most of the officials meetings before this one.