The G20s first Global Financial Summit is unlikely to control the financial crisis
(Bonn, 21.11.2008) The G8 are history. This is the first result of the Global Financial Summit of the G20 on 15.11.2008 in Washington. Beyond that, the summit somehow gave all actors what they wanted, the Wall Street and the City of London got the scope for further expansion of their money trade, the Europeans got stronger regulation, the emerging market countries got the blame for the crisis unloaded on to the rich countries and a strong stake in further decision making, the World Bank and International Monetary Fund got their role strengthened. As usual the Low Income Countries got the receiving end; they received affirmative and sympathetic words.
At the same time the financial crisis is spreading not only to emerging economies but also to Africa:
EED published the Paper: "Making Financial Markets work for Development", providing some groundwork in Germany on the issue of financial markets and development in August. In the meantime events have made economic nightmares come true. However, this time the crisis is not somewhere in Asia, Argentina, Russia or the developing world. This time the crisis hits home. And surprisingly, long held neo- classical economic policy convictions are no more sacrosanct. Rescue operations for the financial institutions and stimulus programmes for national economies have become the rule.
Yet, the crisis does not only hit home. It is spreading. The decoupling theory (insulating countries with less contact with the western banking centres and less complex banking businesses from contagion) was just an anxious rationalisation. The Financial Times on Nov. 9th 2008 has an article headlined: "Indian truck makers cut output" The article explains that India's truck manufacturers are being forced to suspend production because of falling demand, in the clearest sign yet that the global financial crisis has begun to strike at the heart of Asia's third-largest economy.
The same paper reports on Nov. 14 regarding China's Pearl River city Guangdong that its exports are still growing, albeit at a slower pace than last year's 22.3 % increase. They were up 13.5 %, with most pain felt by smaller factories in sectors such as garments, plastics and toys.
On November 12, 2008 the African central banks were meeting in Tunis at the African Development Bank. In their communiqué they say:
"We note that this crisis could not have come at a worse time for the African continent; it constitutes a major setback at a time when African economies were turning the corner. It is undermining the significant progress made over the last ten (10) years and, further exacerbates the impact of the recent sharp increase in food prices and volatility in the oil markets. Climate change will also impose additional costs on African economies. Together, these will particularly impact on the millions of poor in Africa; we are facing a human as well as financial crisis. We are therefore gravely concerned that the prospects for reducing poverty and attaining the Millennium Development Goals will be reduced."
Results of the G20 summit on global finances:
Even in this sober communiqué language one can hear the anguish of the African Governments that they are not the masters of their destiny, that the framework within which they make attempts to prevent a human and financial crisis is not within their area of influence. They look with expectations to Washington, where last week Saturday the 15.th of Nov. the G20[1] held their Global Financial Summit. But will this summit's results meet the expectations of developing countries in Africa and elsewhere and the world in general?
First of all this G20 meeting signifies the end of G8 dominance in World Economy. Not that the G20 represent all of the about 190 countries in the United Nations. But in terms of representation they are certainly far better then the G8. The emerging market countries in the G20 made their presence felt in the communiqué- to some extent. The advanced countries had to accept the blame for the turmoil. The language in the communiqué about who is responsible for the crisis (Policy makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets...) albeit very abstract and unspecific, would have never found entrance into a G8 statement.
Who bears the brunt?
But what are the consequences? Very unspecifically the "Financial Institutions" are advised in the White House G20 Summit Declaration to take the responsibility, bear the losses, disclose data, strengthen their governance and risk management. There is language about the compensation practices in the global banks but no clear ceiling, rule or criteria. But there is no word in the communiqué about who has to shoulder the responsibility for the depletion of public coffers in many countries to safe the basic system of finance and payment that, everyone depends upon. With all the governmental bad debt purchase programmes and the recapitalisation/socialisation of the financial institutions, there is reason to believe that the chief gamblers of the financial casino that put the world into this predicament will not be compelled to accept their part of the responsibility. Moreover, no word about the responsibility of the regulators and their political masters who, while seeing that financial institutions and global banks were risking multitudes of the country's GDP despite very clear warning signs still did not intervene. There's every chance that those who earned billions in the boom will be protected by this system of impunity, where bankers and politicians mutually cover their backs. The damage then will be borne by the small investors who, not being privy to the latest information are always made to pay for the gambling of the big banks. The debt of the financial casino will impact heavily on national budgets, and will reduce their capacity to support education, research, pensions, the environment and global solidarity for a long time to come. Depending on how long the recession will last, this could become a rather dramatic situation.
On developing countries:
The G20 says they are mindful of the impact that the current crisis has on developing countries particularly, on the most vulnerable ones. They affirm the importance of the Millennium Development Goals, the developing commitments they have made (without actually mentioning the 0,7% of GDP for development) and they affirm the Monterrey Consensus but without mentioning the Doha FFD review. They also affirm their commitments on energy and food security and climate change. But without specific measures being proposed beyond these affirmations these words remain empty.
Actions proposed by G20
Ministers and regulators have been given a lot of homework to do, until the next meeting scheduled for April 30, 2009, then with the Obama administration at the helm of the US Government.
The chief profiteers of the financial markets, Wall Street, the City of London and the other financial centres will have to become more transparent, they would be assessed more vigorously, etc. But securitisation, leveraged hedging, derivative trading, nacked short selling, credit default swaps and other instruments of reckless speculation have not been banned. Only the rules for them would become tighter. To regulate them is the action proposed by this first G20 summit. Yes the G20 want to strengthen the regulation of financial institutions but at the same time they are anxious not stifle financial innovations and the expansion of trade in financial products and services. The G20 seem to come down hard on illegal market manipulation and on tax heavens. But all they really propose is to improve information exchange. The finance ministers will now have to work on an action plan schedule, agreed upon by their heads of state. A lot of negotiation will be needed to come to agreements by 31.3.2009 on regulation in transparency and accountability, regulatory regimes, prudential oversight, risk management, promoting integrity in financial markets, reinforcing international cooperation in the area of oversight and supervision and reforming the International Financial Institutions.
Actors:
The G20 intrust high responsibilities on state regulators to control the Rating Agencies and on supervisors and their cross border cooperation and supervisory colleges to control the banks. Supervisors, i.e. the chartered accountants and their standard setting organisations are to supervise global banks cross border. Banks are requested to cooperate with them. In these paragraphs the communiqué sounds strangely surreal. How can auditors control transnational corporations? They could only do so if the TNCs filed country by country tax statements as demanded by Civil Society. But this is not (yet?) an expressed part of the plan however could , if implemented, prevent the most common form of legal tax reduction, known as cross taxation, whereby transnational corporations file tax statements in countries requiring the least taxes.
The G20 want to further reform the World Bank and International Monetary Fund to increase their legitimacy. The logical end to how this is being put in the communiqué is the reduction of the European influence in the IMF. That may be a necessary consequence, given the over proportional representation of Europe in the IMF, to a lesser extent also in the World Bank. But what is really needed is the end of the defacto veto capacity of the US, which is completely unfounded and unjustified. The communiqué is silent on this question. Yet the role of the IMF in surveillance particularly, and in cooperation with Financial Stability Forum - to be enhanced by the membership of emerging market economies of the G20- is underlined repeatedly.
And isn't this surprising. Among the G20 are countries like Brazil, Russia, Argentina, etc. who until recently, couldn't wait to pay back the IMF-loans and get rid of its conditionalities fast enough. And now with being part of the G20 and with the promise of more representation in the IFIs, they even accept a new and strengthened role of the IMF! This very organisation was unable institutionally, to do something against the greatest two bubbles of the recent economic history, the dot.com bubble in 2001 and the real estate bubble in the US of 2008, from where today's financial crisis took its inception. Not that the IMFs economist did not warn. But the board controlled by the interest of the US and the UK treasury departments was unable to act. (And with Hank Paulson, the earlier Goldman Sachs CEO as the US Secretary of the Treasury, nothing in the IMF could be done against the interest of the Wall Street). With all this, it is so surprising that the G20 now accepts an even strengthened role of the IMF. If they are looking for stability in the financial system, the IMF is certainly not standing in for it.
On reserves/currencies:
No new reserves have been made available by this meeting of the G20, only the promise that should there be a need for the IMF to have more reserves for Stand-By agreements, it would be provided. Nothing has been said about currencies except underlining the principles of the free markets. Currency values are an indicator most highly correlated with employment, imports and exports, inflation and debt, etc. High volatility of currency values are not good for developed economies and they are poison for developing countries in need of clear planning horizons for their commodity and/or resource income. Civil Society is demanding ever since the Monterry Conference on Finance for Development in Mexico in 2002 to introduce a modified Tobin Tax both to finance development as well as to control currency speculation.
Real change or more of the same?
This first G20 summit on global finances has certainly not put an end to casino capitalism, but at its planned follow up meeting on Aril 30, 2009 it may add few more rules to the game. But a strong entry onto the stage of world economic politics of China, India and the other emerging market countries would have looked different. A summit declaration of the G8 alone might not have looked much different. Yet a beginning has been made. It will hardly be possible for the G8 to turn the clock back.
The G8 plus emerging market economies have shown the financial markets a brave face at their summit. They would effect a few technical improvements in the system to fool prove it, but otherwise they would like to give a green light to the financial markets that the show can go on. This green light would be switched on as a result of the April G20 conference next year and with that the financial crisis would officially be called off. However the Credit Default Swaps accepted in the system of futures and derivatives equal 4/5 of the World GDP alone. The worlds fate depends on how much of this default money really will have to be paid. The Washington Capitalism (Wasington Post) has become addicted to gambling. It needs detoxification
Civil Society now has to take on the challenge to present clear and strong demands to get its protest heard at the April 30, 2009 G20 summit and to effect changes in the system. Let's get organised!
Peter Lanzet
[1] Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States of America. The European Union
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Last Update: 21.11.2008 14:37:49 |
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