By Simon Kennedy and Kitty Donaldson- BLOOMBERG
The G20 leaders agreed April 2, on a regulatory blueprint for reining in the excesses that fed the worst financial crisis in six decades and pledged more than $1 trillion in emergency aid to cushion the economic fallout. The G20 final comunique
The Group of 20 policy makers, meeting in London, called for stricter limits on hedge funds, executive pay, credit-rating companies and risk-taking by banks. They also boosted the resources of the International Monetary Fund and offered cash to revive trade to help governments weather the economic and social turmoil. They sidestepped the question of whether to deliver more fiscal stimulus in their own economies.
The G-20 statement amounts to an effort to rewrite the rules of capitalism to address an integrated world economy that has outgrown the ability of individual governments to keep it in check. The group, which represents 85 percent of the world economy, devised a model for how finance should be regulated everywhere in a bid to prevent a repeat of the market turbulence that has roiled the globe for almost two years.
“We have reached a new consensus that we take global actions together to deal with the problems we face,” U.K. Prime Minister Gordon Brown told reporters after hosting the talks. The leaders agreed to meet again before the end of the year. While countries will maintain control of their own markets and companies, the G-20 established a new Financial Stability Board to work with the IMF to provide early warnings of emerging risks.
Regulating Hedge Funds
Individual regulatory systems will be revamped to better monitor threats to the whole financial system, the leaders said. Once recovery is in place, work will begin on new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times.
Hedge funds that are “systemically important” will be subjected to greater regulation and oversight as will all key financial instruments, markets and instruments, the G-20 said. Principles will also be introduced on pay and bonuses to create “sustainable compensation schemes” and action taken against tax havens that do not provide more information.
Accounting-standard setters were told to improve valuation methods, while credit-rating companies will be forced to meet a code of good practice.
The G-20’s pact marks a narrowing of differences after German Chancellor Angela Merkel and President Nicolas Sarkozy of France demanded Brown and President Barack Obama endorse a more detailed response to the crisis than that initially planned.
‘Victory for Common Sense’
“The time of bank secrets is over,” Sarkozy said today. Merkel called the agreement a “victory for common sense.”
As the leaders talked, stocks rose and U.S. Treasuries fell on speculation that the deepest global recession in six decades may be abating. Data today showed orders placed with U.S. factories rose in February for the first time in seven months, U.K. house prices unexpectedly gained in March and Chinese manufacturing increased.
Bad news still pervades and may regain the focus of investors as companies from French automaker Renault SA to computer-services provider International Business Machines Corp. ax jobs. The Organization for Economic Cooperation and Development this week predicted the world economy will contract 2.7 percent this year, trade will plunge 13 percent and joblessness in the Group of Seven nations will reach 36 million in late 2010.
Writedowns
That represents the economic pain of a financial crisis that began in August 2007 and has since cost banks almost $1.3 trillion in writedowns and losses, forcing them to seek support from governments and to choke off credit to consumers and businesses.
Having committed $2 trillion in fiscal packages to save their economies, the leaders today said they would “deliver the scale of sustained fiscal effort necessary to restore growth,” while ensuring budgets are sustainable in the long-term. While Obama and Brown have pushed for more cash, European leaders argue they’ve spent enough and faster.
As it becomes inundated with requests for loans from troubled economies including Pakistan and Hungary, the IMF was told it will receive $750 billion to boost its firepower. Multilateral development banks including the World Bank will receive at least $100 billion.
In return for contributing to the fillip, emerging markets such as China and Brazil will receive more of a say in the fund, the G-20 said. The IMF will also use revenue from sales of its gold reserves to aid the world’s poorest countries and its next leader will no longer automatically be a European.
Free Trade
After the World Bank said 17 of the G-20 nations had reneged on a November promise not to pursue restrictive trade practices, leaders reiterated their commitment not to resort to protectionism. They also promised to avoid competitive devaluations of currencies.
Protests continued on the outskirts of the talks after demonstrations yesterday in London’s financial center. Such social unrest will build if rising joblessness and poverty goes unchecked, United Nations Secretary General Ban Ki-moon told the G-20.
The International Labor Organization predicts unemployment could jump by 40 million this year from 193 million, while U.S. joblessness is estimated to have reached its highest in a quarter-century last month.
“I fear worse to come,” said Ban.
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. Officials from Spain and the Netherlands were also present.