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G20 is a hit, but Brown’s battleship stays afloat

“This is the day that the world came together to fight back against the global recession, not with words, but with a plan for global recovery and for reform and with a clear timetable for delivery,” was the way Gordon Brown summarised the outcome of the G20 summit in London.

 

According to the communiqué issued in the name of the Leaders of the Group of Twenty:

 

“We have today therefore pledged to do whatever is necessary to:

 

  • restore confidence, growth and jobs;
  • repair the financial system to restore lending;
  • strengthen financial regulation to rebuild trust;
  • fund and reform our international financial institutions to overcome this crisis and prevent future ones;
  • promote global trade and investment and reject protectionism, to underpin prosperity; and
  • build an inclusive, green and sustainable recovery

 

By acting together to fulfil these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future.”

 

On the whole the outcome was quite impressive and Gordon has worked hard prior to the summit to get this level of consensus. But, as usual the devil is in the detail. The prime minister said that the largest fiscal stimulus in history had been put in place, totalling $5,000bn. However, this was not an announcement of new money but a summation of all the increased expenditure previously announced and introduced by the G20 countries.

 

In particular, there was no agreement to meet the IMF’s call for a further fiscal stimulus worth 2% of GDP, and it looks as though this was quietly shelved, as Germany and France, for example, were very much set against any further fiscal expansion.

 

Also, there was no real agreement what to do with all the toxic assets held by banks around the world, and we are still left in doubt about whether there is some sort of underlying time bomb waiting to surprise us at a future date.

 

Having said that, what was actually agreed? The published headline was that the G20 nations had reached an agreement to tackle the global financial crisis by implementing measures which would be worth $1 trillion (£681bn). There were four main areas of agreement:

 

  • $500bn was pledged to the IMF in increased funding – although much of this had been offered previously and was already on the table.
  • $250bn to be allocated in trade finance to boost world trade – this is the amount of trade that will be financed or covered by guarantee over the next two years, and again most of the money is not new.
  • $100bn will be made available to international development banks to lend to the poorest countries – whilst some of this may be brought forward from future budgets it will substantially come from increased borrowing and new resources.
  • $250bn for a new allocation of Special Drawing Rights at the IMF. This is money which will be ‘created’ in a quantitative easing format.

 

It was also agreed to have tighter regulation of hedge funds and to clamp down on tax havens worldwide.

All in all, perhaps the best assessment comes in a leader from the Financial Times today:

“Some useful progress, but still a way to go.”

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Posted in Banking, Fiscal stimulus, G20, International, International Monetary Fund, Low-income countries, Protectionism, World Trade

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