Today’s G-20 summit brought an important positive surprise in the scale of new resources made available to International Financial Institutions, and a major disappointment on all other fronts. The agreement to commit an additional USD 1,1tn in funds to the IMF (500bn) and other institutions seems to be in part to compensate the complete lack of agreement on further fiscal stimulus at national levels. As I wrote yesterday, this raises the risk that we will have an unbalanced recovery from a prolonged slump. The final communiqué has a very strong emphasis on regulation, and while the general principles are sound (stronger and better coordinated regulation), the details sound more like a shopping list of the current favorite scapegoats (hedge funds, tax havens, bonuses).
The other major disappointment is the lack of any detailed discussion of possible further steps to improve transparency and confidence in the financial system. The impression is that everyone is now hoping that Mr. Geithner’s PPIP will resolve tensions in the US financial system and have a cascading spillover effect across the globe. It is a hope I share, but I would prefer to see G-20 countries stepping up joint efforts on this front, as without a normalization in the global financial system, the green shoots of recovery could quickly wither and die.
Overall, the communiqué is long on lofty principles and short on concrete commitments, and my impression is that EU countries were able to get most of what they wanted into the communiqué, whereas the US will take home very little, except the stronger commitment of resources through IFIs. In terms of market reactions, Emerging Markets should be the big winners, but I see nothing that can bolster a more general confidence in a quicker recovery from the financial turmoil and economic downturn.
The major positive surprise is the large boost of IMF funds which will be tripled to USD750bn, rather than just doubled. This is extremely positive for emerging markets, especially in Central and Eastern Europe, where external financing needs have been identified by investors as the Achille’s heel.
It is especially positive as it coincides with the successful launch of the IMF’s new Flexible Credit Line facility. Previous attempts to offer a contingent credit line to countries with good fundamentals as an insurance against worsening market conditions had systematically failed, as countries feared the associated stigma, namely that markets would see it is a signal of brewing troubles. This time, Mexico has broken the impasse by requesting a USD 47bn credit line, and has been rewarded with a favourable market reaction, including a strengthening of the peso (see chart on next page). This should open the way for more EM to follow suit. Contingent credit lines should work effectively as insurance policies, reassuring markets and lowering the risk of a collapse in confidence.
