By GRAHAM FROST 03/04/2009
As the G20 met, I was reminded of the old joke about the escapee from an asylum entering a launderette, borrowing laundry money from each of occupants, before running off. The headlines next day read as above, which illustrates how the press can brighten up a headline for a mundane event. Has the G20 summit been in that category?
Agreement on more stringent regulations and risk control for financial institutions and a clamp down on tax havens was already a done deal before this conference started, despite some sabre rattling. The devil will be in the detail of implementation on a global basis.
Although no new fiscal stimulus package was announced, the summit did allocate $3 to $4bn in trade finance to promote an expected increase of $250bn in trade over two years, a further $500bn to the International Monetary Fund for country bailouts and another $250bn Special Drawing Rights facility for its 186 members. The latter is the IMF equivalent of quantitative easing or creating money on global scale. The tough conditions usually accompanying IMF aid are a thing of the past, which begs the question, will it get used correctly and will it ever get paid back? Or put another way, will tax payers like us ever get paid back? Who is putting up the money anyway? It looks like China, Germany, and Japan, the surplus nations, will have to contribute the lion’s share and seem to have agreed to stump up the first $250bn. That means they will get greater say in who gets the funds so it seems clear beneficiaries will be Central and Eastern European states and Asian and Emerging markets. That makes investment there slightly less risky, given this safety net. The IMF has already extended $55bn over the last 6 months to the likes of Ukraine, Hungary, Latvia, Belarus, Iceland, Pakistan, and Serbia and was rapidly eating into its existing pot of $250bn. Gold bulls might be disappointed to learn that the IMF will sell part of its 3200 tonnes of gold for financing third world countries.
A fair chunk of the package had already been pre announced or was anticipated but all things considered, the extra money for the IMF is probably the best outcome for providing additional support where it’s most needed without the political difficulties in providing more fiscal stimulus. Of course, many of the numbers are provisional, and again the devil will be in the detail. Rapturous headlines can be misleading.