[20081117]UBS Global: What did the G20 accomplish?

At the conclusion of their heads of state meeting in Washington, the G20 issued a lengthy statement addressing the ‘serious challenges to the world economy and financial markets’. For investors looking for something new and, perhaps more important, something decisive by way of policy action to address those challenges, the statement provided little, if anything, that was new. To their credit, the G20 leaders did endorse the extraordinary policy measures thus far adopted and pledged support to continue those efforts. To that extent, latitude for further monetary and fiscal easing clearly exists and almost certainly will be exercised, albeit with the decisions remaining firmly in national hands, as opposed to in coordinated fashion.
Last week we held a conference call to discuss the scope for global policy cooperation in the face of the current economic and financial crisis.  To summarize, the spectrum of potential coordination spanned monetary, exchange rate, fiscal, regulatory, lender of last resort and trade policies. How does the G20 statement stack up on each?
Monetary policy: Insofar as the G20 meeting was a gathering of heads of state, as opposed to central bankers, little could be announced about the conduct of monetary policy. The statement did mention ‘the importance of monetary policy support as deemed appropriate to domestic conditions’, which at once implied both the desirability of further easing but also that central banks would act in their respective national interest. In short, more easing is highly probable, but the scope and timing is left at the discretion of each national central bank.
Exchange rate policy: The G20 made no references to exchange rates. That may partly reflect the belief that few, if any, significant misalignments exist among the ‘major’ currencies. Equally, the G20 leaders were probably reluctant to draw attention to specific cases of emerging currency weakness.
Fiscal policy: The G20 statement identified the importance of fiscal easing, noting that the: “Use of fiscal measure to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.” Here, too, the language implies a national policy response, suitable to domestic needs. Indeed, it is difficult to imagine any country willing to use fiscal policy to promote global growth interests. Moreover, the G20 statement added little which wasn’t already in the public domain—fiscal easing initiatives have been under consideration or recently put into effect in the US, the UK, Germany and China, among others.
Global lender of last resort: The statement did note the need for emerging and developing economies to ‘gain access to finance’ and stressed the IMF’s ‘important role in crisis response’, including its ‘new short-term liquidity facility’. However, the statement avoided the potentially contentious issue of expanding the IMF’s financing capability via recapitalization. Many European countries, in particular, are wary of any restructuring of the IMF and added participation by larger emerging economies, as that could well lead to a dilution of European voting rights and potential loss of influence. In short, the G20 did little to bolster the global lender-of-last resort function.
Regulatory policy: The G20 statement devoted considerable space to reform of the financial markets:
· It noted the need to strengthen transparency and accountability by promoting fuller disclosure and aligning incentives to ‘avoid excessive risk-taking’.
· The statement included a passage about ‘aligning global accounting standards, particularly for complex securities in times of stress’, which could be seen as allowing credit flexibility in mark-to-market accounting of financial assets.
· The G20 also supported the UK position to ‘establish supervisory colleges for all major cross-border financial institutions, as part of efforts to strengthen surveillance…” Importantly, however, the G20 also re-affirmed the primacy of national regulation of the financial sector: “Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability”.
· Within the framework of global cooperation, the G20 re-affirmed the central role for the Financial Stability Forum (FSF) (to include a broader membership of emerging economies), and did not suggest an expanded oversight or regulatory role for the IMF. The statement also pointed to the need to ‘mitigate against pro-cyclicality in regulatory policy’, which could support initiatives for variable bank capital ratios (with required capital to increase during economic expansions, with some relaxation allowed during periods of financial and economic stress).
· The G20 also called for ‘central counterparty services for credit default swaps’, essentially the establishment of one or more clearing houses. This action step essentially supports an existing initiative of the Federal Reserve.
Trade policy: In an encouraging choice of language the G20 leaders committed to ‘ refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions or implementing WTO inconsistent measures to stimulate exports’. Progress on major trade legislation, and in particular on reviving the Doha Round, is probably beyond national leaders during a period of recession and rising unemployment.
Overall, the G20 meeting was largely a re-statement of already implemented or muted policy responses. While it re-affirmed the necessity for strong national counter-cyclical monetary and fiscal responses, it offered little in the way of new initiatives to support growth. The considerable attention paid to financial regulatory and supervisory policy was to be expected (and is appropriate), but the implications for the financial sector are unlikely to be clear until specific measures are adopted within the framework of the FSF and in accordance with national regulations and legislation. In short, the G20 statement provided precious little guidance for investors, even if though it provided a reaffirmation of ‘best practice’ across various policy responses