G-20 meet underscores gravity of economic crisis

Friday, 11.21.2008, 07:04am (GMT-7)

India Post News Service

WASHINGTON DC: In what appears to have been the biggest and first of its kind global public relations exercise, heads of state of the Group of Twenty met over the weekend in Washington DC at the invitation of President George W Bush to assure economies across the globe that the world is not coming to an end. The overwhelming presence of the international media covering the G20 Summit on Financial Markets and the World Economy held at the National Museum Building in Washington DC, Nov 14-15, underscored the extent and gravity of the economic crisis even as the gathered leaders sought to assure the world of their keenness to find solutions. The G20 countries plus the European Union, together account for almost 90 percent of global GDP.

Little wonder then that the US capital was besieged by the world media as Presidents, Prime Ministers and finance ministers of these nations converged amid serious challenges to the world economy and financial markets, in a cooperative bid to restore global growth and reform world financial systems. With just six weeks of his presidency left, President Bush played the perfect host, facilitating a platform for the gathered leaders rather than taking the lead on the stage. Significantly, the Summit ended with the leaders signing on a declaration, committing to an Open Global Economy, "rejecting protectionism and not turning inward in times of financial uncertainty." And in this regard, the Group of 20 declared that for the next 12 months, they would refrain from imposing any new trade or investment barriers, imposing new export restrictions, and strive to reach an agreement this year on modalities that lead to an ambitious outcome to the Doha Round of World Trade Organization negotiations.

The G20 countries committed to put an initial list of specific measures in an Action Plan that is to be completed by March 31, 2009. Identifying the root causes of the current crisis, the declaration put the responsibility of the crisis squarely on the shoulders of the advanced countries, without necessarily putting the entire blame on the United States, which got away for being the host country - one that is in the process of transitioning to a new administration. The Action Plan is one of the five key objectives achieved by the Summit where the leaders reached a common understanding of the root causes of the global crisis; reviewed actions countries have taken and will take to address the immediate crisis and strengthen growth; agreed on common principles for reforming the financial markets; and asked finance ministers to develop further specific recommendations that will be reviewed by leaders at a subsequent summit; and reaffirmed their commitment to free market principles.

This Summit is the first of a series of meetings to discuss efforts to deal with the present crisis, as well as to address longer-term financial and economic challenges. In terms of participation at this meeting, some had initially proposed that this summit be held among a relatively small group of countries, but President Bush apparently felt it was very important to have a broader mix of countries, both developed and developing, to participate in this discussion. Although the new world order appropriately required the expansion of the members countries, it is not clear if it augurs the end of the G7, the G8, the G8 plus 5 or any other similar grouping.

In addition to the leaders of these countries, the Summit was attended by heads of the World Bank and the International Monetary Fund, as well as the UN Secretary General and the Chairman of the Financial Stability Forum. Root Causes Failure to exercise proper due diligence and seeking of higher yields without adequate appreciation of the risks involved have been found to be the root causes of the current crisis. "Policy makers, regulators and supervisors in some advanced countries did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovations, or take into account the systemic ramifications of domestic regulatory actions," the declaration underscored as a root cause of the current crisis.

The major underlying factors to the current situation were, among others inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes, the declaration said. These developments, together, contributed to excesses and ultimately resulted in severe market disruption, it said. The Summit, however, stuck to the belief that market principles, open trade and investment regimes, and effectively regulated financial markets are still the tried and tested factors for economic growth, job creation and poverty reduction. Of the immediate actions to be taken, the Summit leaders declared that in the face of deteriorating economic conditions worldwide emerging market economies and developing countries be supported, avoid negative spillovers and restore growth through a broader policy response based on closer macroeconomic cooperation.

The leaders agreed that immediate steps could be taken by recognizing the importance of monetary policy support and using fiscal measures as appropriate; providing liquidity to help unfreeze credit markets; and ensuring that the International Monetary Fund (IMF), World Bank and other multilateral development banks (MDBs) have sufficient resources to assist development countries affected by the crisis, as well as provide trade and infrastructure financing. The leaders agreed on common principles to guide financial market reform and pledged that they would continue to take the right steps to get through this crisis. Action Plan Approving an Action Plan that sets forth a comprehensive work plan to implement these principles, the leaders asked their respective finance ministers to work to ensure that the Action Plan is fully and vigorously implemented.

The Plan includes immediate actions to:

* address weaknesses in accounting and disclosure standards for off-balance sheet vehicles;

* ensure that credit rating agencies meet the highest standards and avoid conflicts of interest, provide greater disclosure to investors, and differentiate ratings for complex products;

* ensure that firms maintain adequate capital, and set out strengthened capital requirements for banks' structured credit and securitization activities;

* develop enhanced guidance to strengthen banks' risk management practices, and ensure that firms develop processes that look at whether they are accumulating too much risk;

* establish processes whereby national supervisors who oversee globally active financial institutions meet together and share information; and

* expand the Financial Stability Forum to include a broader membership of emerging economies. The leaders further instructed respective finance ministers to make specific recommendations in the following areas: Avoiding regulatory policies that exacerbate the ups and downs of the business cycle; Reviewing and aligning global accounting standards, particularly for complex securities in times of stress; Strengthening transparency of credit derivatives markets and reducing their systemic risks; Reviewing incentives for risk-taking and innovation reflected in compensation practices; and Reviewing the mandates, governance, and resource requirements of the IFIs.

There was consensus that needed reforms will be successful only if they are grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. Reform of Financial Markets Importantly, the group of 20 has adopted the implementation of reforms that will strengthen the markets and regulatory regimes so as to avoid future crises. "Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability," the declaration said.

However, pointing out the global scope of the financial markets, the group declared that there should be intensified international cooperation among regulators and strengthening of international standards and their consistent implementation to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace, the declaration said.

Also, it said that financial institutions must bear their responsibility for the turmoil and should do their part to overcome it including by recognizing losses, improving disclosure and strengthening their governance and risk management practices.

SRIREKHA N. CHAKRAVARTY