Busch: The G20 Surprise
The draft G20 statement apparently has everything for everyone and the euphoria in the markets is palpable with equity markets rallying strongly, bond yields are higher, and the US dollar is lower.
There even appears to be an agreement between Medvedev and Obama for a one third cut in strategic arms without having to look into each other's soul. (Which is probably a good thing for both of them.)
Details on the G20 statement is still bit sketchy, but here is what I'm seeing:
The IMF is receive $500 billion to increase its resources and be able to make available $700 billion of funding for assistance. The IMF may be able to raise additional funds via bond issuance. IMF gold sales are under discussion for raising additional capital. A $250 billion trade finance package to support global trade flows should be in the communiqué as well.
Systemically important hedge funds are to be submitted for supervision and regulation via a new regulatory institutionand a beefed up IMF. This is akin to the "Super Regulatory" that's being discussed and debated in the United States to ensure another AIG doesn't happen. (No word yet from Bridgewater, Paulson & Co., Brevan Howard, or Soros as to whether they will cooperate.) The new financial stability board is to identify economic/financial risk along with the action that will be required to deal with it. The G20 commit to "Candid, Independent IMF surveillance of their economies and financial sectors."
The G20 are to target tax havens and will publish a list of the offending countries.The Doha trade liberalization talks are to be re-started with the next G8 meeting with Obama to address the group in Italy. This is a big outreach to Brazil, India, and other developing countries.
For currencies, the G20 says that everyone pledges to refrain from competitive devaluation of our currencies. The G20 also pledges to support "General SDR Allocation To Ease Liquidity Restraint" with the UK saying the IMF SDR allocation to be significant and more than double. As I warned, the comments by the Russians and Chinese on a new reserve currency were significant as this increases the importance of the SDR.
All of these wrap up to show that the G20 made serious efforts to bring about agreement on important issues and attempt to address the problems in the world economies. Clearly, the conduit the G20 has picked for changes to world's oversight of financial institutions and economies will be the IMF. This is building on something the Bush administration pushed for in regards to the IMF monitoring how countries use their currencies for increasing their competitive positions.
There are many good proposals and policies being put forward that make this G20 much more productive than the markets were expecting. The sovereignty problem remains as one has to question whether countries will follow through on these commitments to being open to scrutiny and open to the change that the IMF recommends.
How likely is it that either the US or UK will submit to any prescription which includes cutting back on fiscal stimulus? How will the Chinese react if the IMF says that they need to stop intervening to support the US dollar?
Overall, I think the G20's actions to make available loans will be the biggest positive as it helps shift the deleveraging from the individual, emerging countries balance sheets to the IMF. Next, the competitive currency devaluations should mean that the UK and Switzerland won't be allowed to force their currencies lower going forward and this should be a negative for the US dollar. The IMF issuing bonds would add to the massive supply of debt that is hitting the fixed income markets and will be a bond negative.
With the exception of the IMF loans, these moves on the markets will likely be very short term and may not last beyond today.