G20 in Russia – will decision making accelerate by year’s end?

MOSCOW. Feb 18 (Interfax) – The G20 finance ministers and central bank governors have wrapped up their first meeting in Moscow, issuing quite an extensive document – a 26-point communique devoted to some of the main topics of the meeting, such as the global economy, financing of investment, government borrowing and sustainability of government debt, reform of the international financial architecture, financial regulation, expansion of access to financial services, energy and the battle against climate change.

The communique does not contain any revelations or key decisions, yet the ministers and central bank heads met for the first time this year under a new chairman – Russia. However, the document finds room for a detailed view on traditional problems and issues, and the germs of new proposals and discussions.

In order to turn several dangerous corners and get back on the previous schedule for making a number of decisions, the G20 will have to speed up. Whether its crouch start in February was successful will become clear at the end of the year.

A CHRONIC WEAKNESS OF GROWTH

Just about all post-crisis G20 communiques have said the same thing about growth – that it is still too weak, and that unemployment is too high.

“Thanks to the important policy actions in Europe, the U.S., Japan, and the resilience of the Chinese economy, tail risks to the global economy have receded and financial market conditions have improved. However, we recognize that important risks remain and global growth is still too weak, with unemployment remaining unacceptably high in many countries. We agree that the weak global performance derives from policy uncertainty, private deleveraging, fiscal drag, and impaired credit intermediation, as well as incomplete rebalancing of global demand,” the communique said.

“Under these circumstances, a sustained effort is required to continue building a stronger economic and monetary union in the euro area and to resolve uncertainties related to the fiscal situation in the United States and Japan, as well as to boost domestic sources of growth in surplus economies, taking into account special circumstances of large commodity producers.”

“To address the weakness of the global economy, ambitious reforms and coordinated policies are key to achieving strong, sustainable and balanced growth and restoring confidence. We will continue to implement our previous commitments, including on the financial reform agenda to build a more resilient financial system and on ambitious structural reforms to lift growth.”

Long-term financing for investment is a key economic growth factor, the G20 said. This is a new theme for Russia’s presidency, it said.

“Recognizing the essential role that the long-term financing plays in supporting our goal of strong, sustainable and balanced growth, we agreed to establish a new Study Group on Financing for Investment, which will work closely with the World Bank, OECD, IMF, FSB, UN, UNCTAD and other relevant IOs to further consider issues raised in the diagnostic report and determine a work plan for the G-20, considering the role of the private sector and official sources of long-term financing,” the G20 said.

The G20 recommended that international banks invest more actively in the capital of enterprises.

“We think that such multilateral banks as the World Bank or the European Bank for Reconstruction and Development (EBRD) should enlarge their contributions to capitalization of enterprises. As a rule, these banks lend money without taking direct part in capitalization,” Russian Finance Minister Anton Siluanov said after the G20 meeting.

More active investment by international fiscal institutes in capitals of enterprises may become a serious factor fostering direct investments and economic growth, the minister said.

The G20 finance ministers also discussed stimulating investment via public private partnerships and stimulating institutional investors.

“Institutional investors are investing mostly in subfederal bonds today and are not particularly channeling their resources into the real sector,” Siluanov said.

He said the OECD had been instructed to devise methods to stimulate institutional investors, so that they might invest not just in sovereign bonds but also in infrastructure. “Infrastructure has always been a source of development,” he said.

The G20 also recommended the countries stimulate their equity markets in local currencies. “Far fewer companies have been conducting IPOs lately. A few years go we had 2,500, but now half that manya(euro) The stock market is clearly contracting,” he said.

The G20 expects the group to have a plan of action to develop stock markets in local currencies to be ready by July this year.

REGULATION TIGHTENING

“The pendulum is swinging towards tighter financial regulation unbelievably hard,” Russian Deputy Finance Minister Sergei Storchak said. This has been happening in many G20 countries since the crisis, and the communique cites 10 measures in support of this view.

Russia has proposed that its G20 colleagues discuss models for monitoring the quality of ratings that ratings agencies award countries and companies after they are published, Russian Finance Minister Anton Siluanov said.

Regulation of ratings agency activity is currently limited to supervision of methodologies on the basis of which a nation’s economy or a business is evaluated, he said.

“We are proposing to discuss models for following up on the quality of a rating after it is published,” Siluanov said.

This kind of retrospective analysis will allow regulators and market participants to focus on the authenticity and reliability of the ratings assigned to states and companies, he said. “The committee’s tasks could be: to develop recommendations for regulating the activities of agencies, as well as to maintain a kind of accreditation of the list of globally recognized ratings agencies,” Siluanov said.

The communique does not reflect any of this, however. Siluanov said at the concluding press conference that in general, the committee’s work received backing during the financial regulation committee meeting that took place in the run-up to the summit. “I think this will be discussed at further stages of the discussion on financial regulation,” he said.

Deputy Finance Minister Storchak said it took around a year for the G20 to accept a proposal submitted by a member.

“We reiterate our willingness to strengthen the oversight and regulation of the shadow banking sector. We also look forward to policy recommendations for the oversight and regulation of the shadow banking sector by the Leaders’ Summit. We note with concern the delays in the convergence of accounting standards to date and ask the IASB and the FASB to finalize by the end of 2013 their work on key outstanding projects for achieving a single set of high-quality standards. We welcome the FSB’s forthcoming peer review to assist authorities in implementing the FSB roadmap to reduce reliance on external credit ratings and we also call on Standard Setting Bodies to do further work in this area. We look forward to IOSCO’s report on enhancing transparency and competition issues of the credit rating agencies and to further work on these issues. We also expect more progress on measures to improve the oversight and governance frameworks for financial benchmarks coordinated under the current FSB agenda this year, including the promotion of widespread adoption of principles and good practices and ask for reporting to our Leaders at the St Petersburg Summit. We welcome the FSB’s intention to monitor material unintended consequences of financial regulatory reforms for EMDEs as appropriate without prejudice to our commitment to implement the agreed reforms,” the G20 said in the communique.

“We remain committed to the full, timely and consistent implementation of the internationally agreed financial sector reforms. We urge all jurisdictions to adopt the agreed Basel III reforms as expeditiously as possible. We look forward to progress reports on implementing the Basel III framework, the FSB Key Attributes of Effective Resolution Regimes and the reforms of the over-the-counter (OTC) derivative markets at our April meeting, as well as a comprehensive report on progress in implementing all reforms at the St Petersburg Summit in September. We welcome the Basel Committee’s increased focus on comparability of risk-weighted assets and look forward to an update by our July meeting. We reiterate our commitment to take the necessary steps to ensure that all global systemically important financial institutions are resolvable, and to promptly address all impediments to the effective home-host cooperation of the resolution authorities for internationally active banks. Operational resolution plans for all global systemically important banks should be developed by end-June 2013. We ask the FSB to deliver by the time of the St Petersburg Summit an assessment of progress towards ending the problem of “too-big-to-fail”.”

Not all G20 countries have rounded off derivatives market reforms. “There are problems in the directing of obligatory reporting on deals with derivatives to trading repositories, not everywhere are the questions of centralizing trading in these instruments resolved, the introduction of central clearing operations with derivatives,” Finance Minister Siluanov said.

“We also expect more progress on measures to improve the oversight and governance frameworks for financial benchmarks coordinated under the current FSB agenda this year, including the promotion of widespread adoption of principles and good practices and ask for reporting to our Leaders at the St Petersburg Summit. We welcome the FSB’s intention to monitor material unintended consequences of financial regulatory reforms for EMDEs as appropriate without prejudice to our commitment to implement the agreed reform,” the G20 said.

NO WARS, JUST WORRIES

As expected, the G20 reiterated its pledge, first made in November 2012, to refrain from the competitive devaluation of currencies.

“We reaffirm our commitment to cooperate for achieving a lasting reduction in global imbalances, and pursue structural reforms affecting domestic savings and improving productivity. We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments and in this regard, work more closely with one another so we can grow together. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open,” the communique said.
Russian Finance Minister Anton Siluanov told the final press conference the ministers had listened to the Japanese monetary policy account.

“The Japanese colleagues explained their policy, which was approved in the end of last year to solve the deflation problem,” he said.

The minister stressed that Japan had to beat the deflation.

“G20 showed understanding and decided not to single out Japan or evaluate the Japanese government policy in its communique. That’s an internal affair of the country,” Siluanov said.

In his words, the G20 finance ministers agreed that “steps of the Japanese government were so far relevant to the common understanding of monetary policy.”

The countries confirmed their promise to refrain from competitive devaluation of currencies, Siluanov said.

“We agreed there must be no competitive devaluation of currencies. It should be the question of currency regimes rather than currencies. Same as many other countries, Russia has a floating currency exchange rate, which means the market determines the levels of specified currencies itself,” he said.

Whenever the government interferes in the currency exchange rate, imbalances occur and a short-time improvement may be followed by another disproportion, he said. “Naturally, a change in the currency policy of one country will have an effect on other states – its trade partners; then competition of economies is replaced with competition of currencies,” the minister stressed.

Talk about currency wars is unfounded, International Monetary Fund (IMF) chief Christine Lagarde said.

The euro has indeed strengthened and the yen has weakened recently, but due to the right political measures that have been taken in Europe, and monetary easing in Japan, Lagarde said.

Lagarde said after the G20 meeting that there were no currency wars. “There’s been lots of talk of currency wars, and we have not seen any such thing as a currency war. We’ve heard currency worries, not currency wars,” she said.

The threat of ‘currency wars’ around the world is now lower than two or three years ago, and the financial G20 will not be paying too much attention to it, General Secretary of the OECD Angel Gurria said. There are no currency wars. Today the threat of currency wars is less that it was several years ago, Gurria said during a Friday briefing in the context of the G20 meeting.

“I would like to say that in Russia we are committed to balanced global development and to the ideas of joint action,” Central Bank First Deputy Chairman Alexei Ulyukayev said. Russia has already joined the WTO and is preparing to join the Organization for Economic Cooperation and Development, he said.

Russia would like to see a resolution of the global growth problem through joint efforts to provide financial stability and search for the instruments and resources that can be worked well with in the current situation, Ulyukayev said.

The G20 is next due to discuss exchange-rate policies at a meeting in Washington in April.

PUBLIC DEBT AND DEFICITS

Adhering to key financial targets for budget deficits and government debt that they assumed as obligations became a problem for G20 countries. Many countries exceeded these thresholds due to the crisis and have been unable to quickly return to the set targets.

“It’s probably possible to agree that a debt level of 80-90% of GDP might be acceptable in the next few years. It seems to me that this can be discussed in principle, but it is necessary to understand the future trend that such a debt level in the long-term cannot be acceptable in terms of stimulating economic growth and the stability of the financial system,” the Russian finance minister said on the eve of the G20 meeting.

Following the meeting he said that Russia proposed to improve World Bank recommendations on the management of government debt. “We agreed to update these recommendations taking into account the current situation, increasing the effectiveness of such efforts. This is also very important for Russia because the issue of debt management and the effectiveness of such policy brings its own dividends,” Siluanov said.

He said the World Bank recommendations “have a number of anachronisms that are not being fulfilled today and that should be improved.”

“We believe that the issue of updating these recommendations is long overdue and we will prepare such proposals by July, when there will be a meeting of finance ministers in Moscow,” Siluanov said.

“In pursuit of our goal of strengthening the public sector balance sheet, work is needed to better assess risks to public debt sustainability. This includes, inter alia, taking into account country-specific circumstances, looking at transparency and comparability of public sector reporting, and monitoring the impact of financial sector vulnerabilities on public debt,” the G20 said in the communique.

“Advanced economies will develop credible medium-term fiscal strategies by the (September) St Petersburg Summit. Credible medium-term fiscal consolidation plans will be put in place, and implemented taking into account near-term economic conditions and fiscal space where available. We support action to improve the flow of credit to the economy, where necessary,” the communique said.

PIVOTING AND THE IMF

The transformation of the International Monetary Fund (IMF), is a stumbling block in the international financial architecture reforms. No progress has been made here since the 2010 G20 summit, which set a target of early 2013 to review the formula for allocating IMF quotas, taking the new alignment of forces in the global economy into account.

The task is becoming harder – a new formula has to be agreed and quotas calculated according to it by the deadline previously set for the final stage of the reform, the beginning of 2014.

Russian President Vladimir Putin said Russia expected that during its G20 presidency countries will find some common ground and reach agreement on new weightings for IMF membership.

The latest summit did not shed more light on the process, although no meaningful decisions on a formula had been expected.

“We underscore the importance of enhancing the credibility, legitimacy and effectiveness of the Fund. We reaffirm the urgent need to ratify the 2010 IMF Quota and Governance Reform. We note the IMF Executive Board’s decision to integrate the process of reaching a final agreement on a new quota formula with the 15th General Review of Quotas. We commit to achieve, together with the whole IMF membership, an agreement on the quota formula and complete the General Quota Review by January 2014 as agreed at the Seoul Summit. We attach high importance to securing continued progress in meeting these objectives, including on key elements at the September St Petersburg Summit and subsequently at the October 2013 G20 Ministerial and IMFC meetings. We reaffirm our previous commitment that the distribution of quotas based on the formula should better reflect the relative weights of IMF members in the world economy, which have changed substantially in view of strong GDP growth in dynamic emerging market and developing countries. We reaffirm the need to protect the voice and representation of the IMF poorest members as part of this General Review of Quotas,” the G20 communique said.

A decision on a new formula for computing IMF vote quotas is unlikely to be approved before the summit of G20 leaders in September this year, Russian Deputy Finance Minister Sergei Storchak said.

“It is already clear at this stage that a final decision might be reached at the very end of the year,” he said.

Russia is working to convince its partners in the G20 of the need to approve a road map spelling out the schedule for one or another decision.

Agreeing a new IMF quota formula proved to be more difficult from a negotiating standpoint. “To a certain degree, the G20 offered a concession to non-member countries and agreed that the main role was to be played by representatives of ministers in the International Monetary and
Financial Committee, which is gathering at the level of deputy heads. Shifting the accent in the negotiations from the G20 to the IMFC has so far not produced results,” Storchak said.

CHANGES IN STORE FOR G20?

There have been increasing doubts recently about the decisions of the G20, or rather its ability to carry out its own decisions. Indeed, the stalled reform of the IMF and failure to meet obligations on balanced growth give grounds for some disappointment in the institution.

Even Russia’s Audit Chamber, not long before Russia hosted the G20 in Moscow, published its own discouraging conclusions following a comparison of the level of development of G20 members and an analysis of potential risks for the development of the global economy. “There is a certain risk of G20 nations failing to fully fulfill assumed obligations, including due to the possible escalation of the global financial and economic crisis, which could lead to the loss of confidence in this international institution and diminish its reputation,” the fiscal watchdog said.

The Audit Chamber believes the G20 nations’ failure to fully meet their obligations is helping to increase the risk of a breakdown in global cooperation and the risk of sovereign defaults by certain countries due to their inability to service their large debts, which could escalate the global financial and economic crisis.

Alexei Kudrin, a former Russian finance minister who was actively involved in past meetings of the G20, believes there are objective grounds for concern that the G20 will lose its credibility.

“During the crisis, it was necessary to come together and quickly make joint decisions. A joint effort was needed and it was made, everyone coordinated with one another, supported one another. Now, when the urgency has diminished, the question has indeed arisen as to what degree all this will continue to work, whether the measures that were declared will be implemented in concrete documents, regulations, whether they will be adopted by the countries’ governments, the political institutions of these countries,” Kudrin told reporters on the even of the G20 meeting in Moscow.

Kudrin said countries have started to come to the conclusion that simply having a club system without elements of control might not be sufficient, but “to what extent the G20 will turn into an international institution with its own control apparatus and secretariat has not been decided yet.”

“Indeed, everyone is standing at this crossroads, and these questions will need to be partially answered during our presidency,” Kudrin said.

He said several panel discussions at the World Economic Forum in Davos were devoted to the fate of the G20. “Not in the sense that everything’s bad, nothing is being done and its credibility is declining, but in the sense of what needs to be done so that its influence does not wane and whether this is needed or should the G20 focus on some range of issues and only work on them, not expanding its agenda. Whether to introduce a mechanism of responsibility for not making decisions, which will require a certain bureaucratization of this institution,” Kudrin said.

He said there is also the problem of how representative the G20 is. The “IMF and World Bank have 188 member countries, the United Nations has 193, while the G20 does not represent the views of the majority, although it represents more than 80% of global GDP, but there is no formally full representation,” Kudrin said.

“Countries that were left outside the G20 are very jealous that decisions are being made without them and inviting 5-10 countries for discussions does not solve the problem. The question is how to legitimize this institution. The G20 lives its life, fills a certain niche, but how it will live in future is indeed a question,” Kudrin said.