G-20 Backs Regulation Crackdown, $1.1 Trillion Aid (Update3)
By Simon Kennedy and Kitty Donaldson
April 2 (Bloomberg) -- World leaders agreed on a regulatory blueprint for reining in the excesses that fed the worst financial crisis in six decades and pledged more than $1 trillion in emergency aid to cushion the economic fallout.
The Group of 20 policy makers, meeting in London, called for stricter limits on hedge funds, executive pay, credit-rating firms and risk-taking by banks. They tripled the firepower of the International Monetary Fund and offered cash to revive trade to help governments weather the turmoil resulting from the surge in unemployment. They avoided the divisive question of whether to deliver more fiscal stimulus to their own economies.
The G-20 statement amounts to an effort to rewrite the rules of capitalism to address an integrated world economy that has outgrown the ability of individual governments to keep it in check. The aim was to prevent a repeat of the market turbulence which has roiled the world for almost two years.
“We have reached a new consensus that we take global actions together to deal with the problems we face,” U.K. Prime Minister Gordon Brown told reporters after hosting the talks. “There was substantial agreement on the need for us to do whatever is necessary to return to growth.”
The leaders will meet again in New York in September, French President Nicolas Sarkozy said.
While countries will maintain control of their own markets and companies, the G-20 sought “greater consistency and systematic cooperation.” It will establish a new Financial Stability Board to bring together regulators and work with the IMF to provide early warnings of potential threats.
Regulating Hedge Funds
National regulatory systems will be revamped to better monitor threats to the global system, the leaders said. Once recovery is in place, work will begin on new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times.
Hedge funds that are “systemically important” will be subjected to greater regulation and oversight as will all key financial instruments, markets and instruments, the G-20 said. That signals a setback for German Chancellor Angela Merkel and Sarkozy, who wanted all of the investment funds to brought under the spotlight.
Principles will also be introduced on pay and bonuses to create “sustainable compensation schemes.” Accounting-standard setters were told to improve valuation methods, while credit- rating companies will be forced to meet a code of good practice.
Tax Compromise
Having proved a sticking point at the talks, the G-20 said it will impose sanctions on tax havens that do not provide enough information. Officials split over the OECD publishing a list of such nations, agreeing in the end not to block it.
The G-20’s pact marks a narrowing of differences after Merkel and Sarkozy entered the talks demanding Brown and President Barack Obama endorse a more detailed response to the crisis than that initially planned.
“We never thought we would find an agreement this large,” Sarkozy said today. Merkel called the agreement a “victory for common sense.”
Nobel laureate Joseph Stiglitz, a professor at Columbia University, said in an interview while the “devil is in the details” of how new rules will be implemented, the G-20 had made a “major step forward” in saying markets should be subjected to greater state control.
Stocks Rise
As the leaders talked, stocks rose and U.S. Treasuries fell on speculation that the deepest global recession in six decades may be abating. Data today showed orders placed with U.S. factories rose in February for the first time in seven months, U.K. house prices unexpectedly gained in March and Chinese manufacturing increased.
Bad news may regain the focus of investors as companies from French automaker Renault SA to computer-services provider International Business Machines Corp. ax jobs. The Organization for Economic Cooperation and Development this week predicted the world economy will contract 2.7 percent this year, trade will plunge 13 percent and joblessness in the Group of Seven nations will reach 36 million in late 2010.
That represents the economic pain of a financial crisis that began in August 2007 and has since cost banks almost $1.3 trillion in writedowns and losses, forcing them to seek support from governments and to choke off credit to consumers and businesses.
With banks still bogged down by toxic assets, the G-20 promised “to take all necessary actions” to restore the availability of credit and protect key institutions.
Budgets, Inflation
Having committed $2 trillion in fiscal packages to save their economies, the leaders today said they would “deliver the scale of sustained fiscal effort necessary to restore growth,” while ensuring sustainable budgets and price stability in the long-term.
Obama and Brown have pushed for more spending only to run into resistance from Merkel and Sarkozy, who argued they’ve done enough. The IMF will oversee the actions taken which should accelerate the recovery of the global economy to its long-term trend, the group said.
As it becomes inundated with requests for loans from troubled economies including Pakistan and Hungary, the IMF was told its war chest will be boosted by $500 billion and it will receive another $250 billion in special drawing rights, the agency’s synthetic currency.
Multilateral development banks including the World Bank will be enabled to lend at least $100 billion more.
‘Historic’
“It’s historic,” said Colin Bradford, an economist at the Brookings Institution in Washington.
In return for their contributions, emerging markets such as China and Brazil will receive more of a say in the fund, the G- 20 said. The IMF will also use revenue from sales of its gold reserves to aid the world’s poorest countries and its next leader will no longer automatically be a European.
To bolster trade the group said it will spend at least $250 billion over two years on easing trade finance and said it remained committed to completing the stalled Doha round.
After the World Bank said 17 of the G-20 nations had reneged on a November promise not to resort to protectionism, leaders vowed not to introduce any restrictive trade practices through 2010 or to pursue financial policies which hurt other nations. The World Trade Organization will report quarterly on any violations.
The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union. Officials from Spain and the Netherlands were also present.
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