This is one of those rare occasions when reporters, commentators and professional analysts completely agree; the result of the G20 meeting this weekend is absolutely meaningless. In summary, the G20 countries played down their commitment to implement new bank rules, but committed to halve their budget deficits by 2013 and stabilize their debt to national income ratios by 2016, as they’ve done several times before.
“These targets are not likely to require new policy action because G20 countries are already planning austerity measures on this scale.”
Expectations were limited ahead of the Toronto session, largely because most of the issues of financial regulation weren’t scheduled for completion until the end of the year at the Seoul summit. But the conference became a way for major nations to try to address fears in the market that government spending was spinning out of control.
However, the G20 targets are non-binding, and there will be no sanctions for countries who fail to do so.
Senior G20 sources says they hope it will send a signal to financial markets that the global community is serious about deficit reduction.
Personally, I can’t see any reactions in the financial markets today that suggest that investors feel more reassured.
The bank stocks are pulling the stock market higher, probably as a little relief rally since the threat of tighter regulations have been pushed further out in time.
The G20 countries continue to insist on tougher capital rules in principle but there were considerable differences over what a capital buffer means and the speed of adoption. They came up with a least common denominator on adoption, with the previous target date of 2012 no longer a “target” but an “aim” and allowing a phasing-in of the new rules.
Final agreement on the rules and its adoption is left for the summit in Seoul in November, after the BIS presented its roadmap.
Not Out Of The Woods
“We are in a holding pattern. The market certainly waits to see what impact does fiscal tightening have on the economy. People are definitely cautious,” Peter Dixon, economist at Commerzbank, says according to CNBC.
“We are not out of the woods on this,” he says, referring to the conclusions of the weekend meeting of G20 leaders in Toronto.
“There is still some possibility that further down the line we are going to come up with much more stringent rules, such as the absolute size of the banks, which will put a brake on the ability of bigger banks to leverage their balance sheets the way they have done.”
G20 countries agreed on Sunday to take different paths for cutting budget deficits and making their banking systems safer, a reflection of the uneven and fragile economic recovery in many countries.
In a reversal from the unity of the past three crisis-era Group of 20 summits, the leaders left room to move at their own pace and adopt “differentiated and tailored” policies.
“There are some legitimate doubts. Government finances in most of the mature economies are really in trouble, so we have to do something about that. But it will probably pressure growth,” says Luc Van Hecka, chief economist at KBC Securities.
“The G20 meeting in the weekend did not result in any real, market-moving news. Asian share prices were approximately unchanged last night. The US dollar has weakened somewhat vs. the euro and the yen. From its weakest on Friday afternoon, the krone has strengthened, trading below 8 vs. the euro,” senior economist Bjørn-Erik Orskaug at DnB NOR writes in his Morning Report.
“One of the headlines from the G20 meeting is that countries have reached agreement on fiscal policy going forward. In reality, this is not really newsworthy. In the communiqué, the risks associated with a synchronised fiscal tightening (i.e. a double dip) are highlighted. However, the risks associated with a too slow pace of consolidation are also emphasised. A common goal now is to reduce fiscal deficits in advanced countries by half within 2013 and to stabilise the debt to GDP-ratio by 2016. Such a deficit reduction is already in the budgetary plans of most of the large advanced countries, including the US. The doubt is rather how in practice this deficit reduction will be attained. Moreover, the need for consolidation varies strongly among countries. For some, the deficit will have to be reduced by more than half. The G20-meeting did not give anything new in terms of how the deficits will be reduced or which countries will have to do the most,” the Norwegian analyst writes.
A Total Failure
The strongest critique is being provided by Financial Times columnist, Clive Crook, who calls the Toronto Summit for a “total failure”.
“The first Group of 20 summit in November 2008 proclaimed a new era of “global solutions to global problems”. Less than two years later, with the economic crisis barely contained, the partners are at odds. Reaching agreement was not the main challenge in Toronto this weekend. They knew that was not going to happen. Mainly, they hoped to put the best face they could on disunity,” he writes.
Adding: “How much do these divisions matter? The main bone of contention in Toronto was fiscal policy. Here, I would argue, simple ineptitude seems to be a bigger problem than disinclination to co-operate.”
“In 2008 and 2009 it was obvious that powerful fiscal and monetary stimulus was necessary everywhere. When everybody wants the same thing, co-operation is easy. How easy? You would have got the same result without it. Last year, co-operation cost nothing and, as compared with the alternative, achieved nothing. In 2010 circumstances have changed. Some countries still have room for fiscal manoeuvre. Others have less and some have none. Co-operation is therefore more difficult – and, you could argue, more necessary.”
“In a world of suppressed demand, where cross-border flows of saving and investment need rebalancing, the textbook case for fiscal co-ordination is clear. Countries with external deficits and encroaching borrowing constraints should rein in fiscal stimulus; countries with external surpluses and untapped debt capacity should maintain or increase it. With agreement on which country falls under which dispensation, governments could optimise fiscal adjustment and support better-balanced growth. Disagreement, which is what we have, increases the risk of another global downturn,” Clive Crook points out.
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