G20: A citizen’s guide

Last week’s demonstrations deflected attention from the decisions taken by the world’s leaders to tackle the global economic meltdown

Sunday 05 April 2009 00:00
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Will the action on the IMF work?

Central and Eastern European nations will certainly hope so. Ukraine, Hungary and Latvia have already gone begging to the IMF for financial aid. Poorer countries should feel reassured by the scale of the funds now available to the IMF. However, some of the promises had actually been made before, such as the commitments from the European Union and Japan to put $100bn each into the IMF, making the huge figures somewhat deceptive.

What was decided on international regulation?

A Financial Stability Board, backed by all members of the G20, will be granted powers to regulate the world's financial markets, while there will be a crackdown (although no cap) on bankers' pay and bonuses. French President Nicolas Sarkozy, once a big fan of Margaret Thatcher, triumphantly declared that "a page has been turned" on "the Anglo-Saxon" financial system.

Will the action on international regulation work?

Major employers' body the CBI has some concerns. Director-general Richard Lambert said "more harm than good" could come of too much regulation if produced and implemented "in haste". He added that the financial markets were so shocked by the crisis over the past year and a half that they have developed a natural self-regulation, meaning that any additional measures could prove to burden economies. However, the big fear in recent months was that major economies would veer towards protectionism and G20 leaders sufficiently knocked this notion on its head.

What was decided on tax havens?

Some of the summit's greatest tension surrounded tax havens. In one corner was the not so diplomatic Mr Sarkozy, in the other Hu Jintao, the president of China. Mr Sarkozy wanted to endorse a list of rogue tax havens listed by the Organisation of Economic Co-operation and Development; Mr Hu was more sceptical. US President Barack Obama found a compromise, whereby the duo would take note of the list. All this means that there will be a crackdown on tax havens, signalling an end to banking secrecy.

Will the action on tax havens work?

Probably. The world's major economies are in agreement that banking secrecy undermined the global economy, with a lack of information making it impossible to calculate the scale of the problems. The likes of Switzerland and Liechtenstein had already agreed to adhere to international rules on tax co-operation in the run-up to the summit. That left just only nations – the Philippines, Costa Rica, Uruguay and the Malaysian territory of Labuan – blacklisted as unco-operative tax havens that will suffer yet to be decided sanctions which are currently under consideration.

What was decided on a fiscal stimulus?

Brown didn't exactly get what he wanted on the stimulus but the decision to pour more than $1.1trn into the coffers of the IMF wasn't a bad result. The IMF lends to struggling developing countries rather than the likes of the UK, so we won't see a penny. It was agreed that the IMF will monitor the effectiveness of fiscal stimuli already in place around the world. Estimates suggest that by the end of 2010, some $5trn worth of cash will have been spent to prop up ailing economies.

Will the fiscal stimulus work?

Well, investors in the financial markets certainly seem optimistic. Shares in the FTSE 100 rose 4.3 per cent on Thursday, crossing the hugely significant psychological barrier of 4,000 points for the first time since February. However, Hernando de Soto Polar, the world-renowned Peruvian economist, told The Independent on Sunday this week (see page 77) that the financial crisis cannot be tackled until there is a full, reliable review of just how much toxic debts, or bad loans, were given when the global economy was booming.

How much will it all cost ?

The headline figure is the $1.1trn of new cash which has been committed to the IMF, including a trebling of the IMF's resources from $250bn to $750bn. There is also an extra $100bn of new lendng to low-income countries by global institutions such as the World Bank. Some $250bn has been promised to the IMF in new Special Drawing Rights, which in effect amounts to a global quantitative easing policy because it will allow countries to protect themselves against currency speculators and be a buffer against possible balance of payment crises. More pertinently, this vote of confidence in issuing new SDRs shows that a new international reserve currency is moving ever closer. Another $250bn has been pledged to support trade through the World Bank. Early estimates suggest that as much as $5trn may have to be spent by the wealthier G20 nations over the next few years in propping up troubled and emerging economies.

Who pays?

We all do, through our tax codes. All the new money is coming from the G20 countries which pay pro rata to the IMF. Wealthier countries with healthy surpluses, such as China and Germany, are being leant on to pay more. China is thought to have agreed to pay a much bigger slice, some $40bn, but this is unconfirmed.

What issues were not dealt with?

Perhaps the biggest issue which the G20 leaders failed to tackle is the complex problem of toxic debt. No one knows for sure, but it is estimated there is some $600trn worth of derivative contracts which have been written between banks and financial institutions and exist in the shadow economy. A couple of billion of this is considered "toxic" paper. Until we know precisely how much and who has the toxic paper, the markets will remain paralysed because none of the banks trust each other. If G20 leaders want to halt the recession, they have to get all this paper documented and then it can eventually start being traded. This is the only way to get lending again to small businesses – the lifeblood of any economy.

What's the most likely economic scenario for the next two years?

According to the experts in the City – the ones that got us into this mess in the first place – a recovery in fortunes for the global economy isn't likely until 2011. It seems we are destined for another two years of rising unemployment, corporate bankruptcy, increasing fraud and more government spending to get us out the deepening hole. But in these markets two weeks, let alone two years, seems horribly long-term.

What did the demonstrators achieve?

It depends which ones. The greens and world poverty campaigners made their points, which were reflected, in pale form, in the communiqué. Most of those looking for violence were disappointed, although some that like the sound of breaking glass got to smash the windows of RBS. The "hang a banker" contingent got something off its chest, possibly at the cost of frightening the more moralistic section of society that believes in the power of writing disapproving letters to the newspapers about bankers' pay.

Is Gordon Brown now a hero?

The Prime Minister could not have wished for more glowing praise from fellow world leaders – led by Barack Obama. His pitch to be "chancellor of the world", shepherding leaders to sign up to the $1.1trn agreement, has won favourable headlines across the globe. But back home, unemployment is still rising and he can give little away in the forthcoming Budget. The electorate will still punish the Government in June's local elections, and if the global new deal fails to make any impact on the recession, they will vote him out at the next election.

Was it really Barack Obama who saved the day?

A row between China and France over tax havens was solved at the last minute after crucial brokering by the US President, who persuaded Hu Jintao to accept an OECD blacklist of countries. This saved the text of the communiqué – but the day was also saved by Mr Brown's persistence with Angela Merkel, getting the German Chancellor to sign up to the key line that countries would do "whatever is necessary".

Is Barack Obama using foreign policy theatrics to distract from trouble at home?

Certainly, little harm can come from television pictures of fawning European crowds. Yet, the Obama honeymoon is not yet over domestically. It also helps that the US Congress passed a budget last week that is not very different from the one he proposed.

Has Barack Obama made friends with Dmitry Medvedev?

The Russians seem genuinely to be responding to Mr Obama's offer to "press the reset" button in relations with Moscow, and their meeting on the fringes of the G20 in London ended with the potentially important commitment to reignite talks on a further mutual reduction of nuclear stockpiles. But the US leader should not raise hopes too high, because many points of tension remain, including Washington's refusal to forgive Russia for its military incursion into Georgia. Mr Medvedev is still unhappy about the alliance's eastward push.

Did the G20 leaders do anything for developing countries?

They did, and more than was expected. Gordon Brown and his officials made rescuing developing countries central to the summit, and it turned out to be the main focus for discussion on Thursday. The leaders agreed to make $50bn available for the poorest countries, through increasing the money the IMF can lend and providing finance to get trade growing again.

Will this help poor people?

That's much less clear. It could stave off utter disaster, but is likely still do little to improve their lives. Progressio, the development charity says: "At best it will keep poor people where they are, rather than lifting them out of poverty." And it could make things worse for them: the IMF has a history of deepening the plight of the poor by imposing Thatcherite policies in return for funds, and the export credit agencies which would administer trade finance aren't much better.

Will the agreement prevent an even bigger crisis in future?

It has taken steps to increase financial stability and crack down on the irresponsible greed hitherto encouraged. But it has done virtually nothing about the two, far greater, crises just over the horizon: accelerating climate change, and a sharp energy crisis as oil production peaks. The answer to both, and the best way of providing growth to end the recession, as Gordon Brown has acknowledged, is a "global green new deal". But this was nowhere to be seen last week.

The G20 leaders have committed themselves to:

A significant increase in the funds available to the International Monetary Fund (IMF), Multilateral Development Banks (MDBs) and the World Bank to support national economies. Estimated cost: $750bn (£506bn).

Progress on the reform of international financial institutions, including quota and voting rights, merit-based senior appointments and consideration of a stronger role for the IMF’s governors.

Measures to achieve major, co-|ordinated fiscal stimulus across key economies. Estimated cost: $250bn.

The creation of a new Financial Stability Board (FSB), working with the IMF to identify and address financial risk. It will include members from G20 nations.

Commitments to joined-up and strengthened regulation of financial institutions, markets and instruments. Estimated cost: $100bn.

Commitments to maintain open economies and trade policies and not to resort to protectionism. Nations that go against this will be “named and shamed” by the WTO.

Contributors: Margareta Pagano, Simon Evans, David Usborne, Jane Merrick, Geoffrey Lean and John Rentoul

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