The world’s biggest nations will struggle to raise an extra $8 trillion (£5.1 trillion) in badly needed investment without “far-reaching reform” of the global financial system, a panel of international experts warned today.
The Group of 30 — a think-tank featuring such luminaries as outgoing Financial Services Authority chairman Lord Turner and former European Central Bank president Jean-Claude Trichet — said the annual need for long-term investment in areas such as infrastructure, housing and education would hit $18.8 trillion by 2020, from $11.7 trillion in 2010.
But the G30 warned: “There is mounting evidence that the post-crisis financial system is not well structured to provide the level of long-term financing that is required to support global economic growth.”
The group based its warning on a McKinsey study of nine major economies including the UK, which together account for 60% of global output. Spending on investment among the nine will have to increase to 34% of gross domestic product from 30% in 2010, it found.
The G30 highlighted the threat of banks shrinking their balance sheets as well as the demand for higher capital levels to meet post-crisis regulatory regimes such as Basel III, which raises the cost of long-term loans. Deficit-cutting in the years ahead is also likely to limit infrastructure spending, while ageing populations are shifting towards lower-risk deposits, pushing up the cost of long-term equity finance for businesses.
The think-tank recommends a freer hand for long-term investors such as pension funds, sovereign wealth funds and insurers. It said pension funds facing deficits had been forced to take a short-term view and insurance funds had cut their exposure to equities in anticipation of Solvency II regulations.
The bonuses paid to investment fund managers should be “reconfigured” to encourage them to focus on long-term investments, according to Lord Turner. “Portfolio managers’ bonuses could be conditional on their performance over a defined period: for senior managers, a minimum of three years,” he said.
The G30 recommends greater use of public-private partnerships and dedicated long-term financing institutions — as well as the savings from compulsory pension schemes — to boost the flow of funds. It also calls for a more developed corporate bond market in Europe and emerging economies to support bank lending, as well as “prudent” growth in securitisation. “With the right standards and regulations in place, more small business loans could be packaged into securities and sold to investors, enabling banks to extend more credit,” the report said.Reuse content