Will the G20 Fall Prey to Collective Amnesia?

October 21st, 2010

BERLIN—On Friday and Saturday this week (October 22d-23th), the G20 Finance Ministers and Central Bank governors are due to meet in South Korea. The G20 had raised big expectations at a time when it promised the end of bank secrecy (London, April 2009). At that time, capital markets were reaching their lowest point over several years. Since then, they have partially recovered and the G20 tone has considerably softened. Would we have a correlation between Dow Jones levels and G20 softness? Without going that far, we can only reaffirm that transparency and the fight against corruption still have to be mainstreamed into the recovery agenda. Fiscal stimulus has played an important role in the recovery of several big economies, but reporting has been uneven on disbursement and spending. Central bank reporting is far from being a common rule, and we do not know yet where we stand in the peer review assessment through the Financial Sector Assessment Programme (FSAP), which should review risks in the various country financial sectors following the June Toronto summit.

Courtesy of the Presidential Committee for the G20 Summit

The recommendations of the Financial Stability Board on the “too big to fail” institutions are yet to be seen, and they should be submitted to the upcoming Seoul summit of G20 heads of state in November. If they fail to include significant enhancement in risk disclosure to clients and investors, they will probably have missed what is most urgently needed to prevent future crises. The multilateral financial institutions also have to mainstream transparency requirements in their dealings with governments or private entities. The recently reformed IMF safety nets, whether flexible or precautionary credit lines, have to be managed in a way that will bring about concrete changes in the framework put in place to fight corruption and the misuse of funds locally.

Generally speaking, increased capital outflows have to be accompanied by swift regulation. “Money fast, regulation slow” cannot be the underlying principle of the G20 action plan. More lending from the IMF and other institutions, more leveraging of private capital, more flexibility, increased front-loading, borrowing on a precautionary basis, all those measures increase money flows, but at least in the G20 public recommendations, we find no additional anti corruption commitments from borrowers or private lenders.

To the contrary, if the G20 has been fast recommending increased lending facilities, new regulation seems to be envisaged in an increasingly cautious manner. According to the G20 Finance Ministers’ meeting last June, prudential regulation is “to be phased in as financial conditions improve and economic recovery is assured, with the aim of implementation by end-2012”. What will happen if we face a new crisis before end 2012? Who will explain to the populations that the leaders’ major concern was to re-inject cash in an ill-functioning engine, without repairing the engine itself? Abuse of money has dried up money flows, money flows have to be eased but with new regulations which have to bring about a paradigm shift, from short term profit to long term growth.

Lastly, the G20 seems to be empowered, or to have empowered itself, with global governance, but it is not a global government. Global governance at the G20 level is fine; implementation by local, national governments is better. The Financial Stability Board has to report on national and regional implementation of financial regulation at the 22-23 October meeting of the Finance Ministers and Central Bank Governors. So far the G20 communiqués have been extremely vague on domestic implementation, mentioning only that “initiatives are underway in a number of jurisdictions”. Regulation on sound compensation, hedge funds, credit rating agencies, derivative trading, will be as strong as its weakest domestic link. Same is true of the abuse of bank secrecy. As long as big powers or financial centres, within or outside the G20 boundaries, allow investors to undertake quick, risky and opaque deals, the entire global system will be at risk. Each important financial crisis, from 1929 to 2008 through the Enron failure in 2001, has been followed by calls for greater clarity or, as we say now, transparency. Subsequent recovery has then caused collective amnesia, but in our globalized world with globalized challenges, collective amnesia is an illness we can hardly afford.

Written by François Valérian

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