Country positions for the London Summit

Briefing by Barbara Sennholz, Bretton Woods Project, 13 March 2009

Background

On 2 April 2009 the UK government hosts the London Summit that deals with the financial crisis and potential reforms of the global financial architecture. It follows up on the G20 summit in Washington in November 2008.

The G20 are a group of 20 industrialised and emerging market countries, as well as the EU represented by its Council presidency (currently Czech Republic) and the European Central Bank. It overlaps partly with other groupings: All members of the G8 are in the G20; Argentina, Brazil, Mexico, South Africa, and Mexico are in the G20 as well as in the G24; and Argentina, Brazil, India, Indonesia, China, and South Africa are in the G20 as well as in the G77, both groupings of developing countries. G20 member South Africa also chairs a new grouping, the African Committee of 10 (C10), comprised of five finance ministers and central banks from Southern, Northern, Western, Eastern and Central Africa, which is pulling together an emergency recovery plan for Africa. It is also involved in the AU, the African Development Bank, and UNECA, and has been tasked with conveying an African perspective to the G20.

Apart from the usual attendants on G20 meetings, the UK has also invited Spain and the Netherlands as well as the chair of The New Partnership for Africa's Development (NEPAD), the chair of the Association of South East Asian Nations (ASEAN), the president of the African Union (AU) Commission, and the president of the EU Commission for the London Summit.

The paper is based on information provided by individuals and civil society organisations in most of the participating countries as well as publicly available documents. However, the author takes responsibility for how the information has been used and incorporated into the paper. If you have any comments, additional information, or doubts, please write Barbara at Bretton Woods Project, fincrisis@brettonwoodsproject.org .

Reforming IFIs

IMF governance

Regarding IMF governance, several countries favour an increase in voting rights and shares of emerging markets and developing countries (UK, Indonesia, China, Japan, Australia, US, South Africa), but did often not make any detailed proposal. UK and Australia spoke especially about China and India; the US mentioned "dynamic emerging economies" and the EU referred especially to the "poorest countries". Currently, the next quota review is scheduled for 2013, but it is likely to be brought forward to 2011 (US proposal). The US also proposes to agree on a "roadmap with a time frame" to enhance voice and representation. The IMF itself suggested that in the future IMF chiefs might not always come from Europe.

Canada said emerging markets need to pay their share if they want more voting rights and that the governance of the institution should not only reflect economic strength but also the resources a country is willing to contribute for the provision of public goods. Similarly, the EU "encourages emerging economies to assume a greater responsibility" and the US linked the voting shares to the "financial roles of the dynamic emerging market economies in the international financial institutions".

Given the broad consensus, it seems likely that we will see changes in voting rights and shares in the future, but they will surely be very limited.

IMF resources

Regarding IMF resources, EU leaders and India called for doubling IMF easily usable resources to $500bn to help countries coping with the crisis. US Treasury Secretary Timothy Geithner talked about a total of $500bn in additional loans by the IMF, making it double what has been proposed by the EU and India. Similarly, Canada wants the IMF resources to be increased to meet short-term needs for tackling the crisis, but opposes "supersizing" the institution in the long run.

It seems likely that the G20 will announce more resources for the IMF but so far it is not clear where these resources will come from. Germany declared it would help the IMF if necessary. The current US administration asks Congress to double the US commitment to $100bn. UK Foreign Office Minister Mark Malloch-Brown explained that the UK wants to agree on a coordinated package regarding enhanced IMF resources. The UK said that it will contribute resources depending on the income model agreed upon, and it has repeatedly mentioned emerging economies such as China and Saudi Arabia as well the Sovereign Wealth Funds as contributors. China has so far not agreed to contribute to additional IMF resources, whereas Japan has said it will lend $100 billion to the IMF for helping out crisis-hit countries.

Apart from contributions by countries, the UK and Australia seemed to favour the allocation of Special Drawing Rights (SDRs) to the IMF’s newest members. The US proposed to increase the current New Arrangements to Borrow (NAB) by up to $500bn (from currently $50bn) and to include more of the G20 countries into the arrangement. Besides, it mentions the one-time allocation of SDRs and potential gold sales.

UK Prime Minister Gordon Brown suggested that a new facility for additional lending (in addition to existing IMF reserves) should be built - either through a new issuance of Special Drawing Rights or through a trust or bond scheme, and that this could have a different form of governance to the IMF in a transitional stage. However, this idea has not been picked up by others and thus seems unlikely to be discussed at the summit.

IMF roles

Regarding IMF roles, countries made a variety of proposals. China mentioned that the IMF should properly cope with financial fluctuations. Furthermore, Chinese Premier Wen Jiabao spoke about an early warning system. Especially on the early warning system, a minister of China’s Central Bank said IFIs should help developing countries establishing (national?) warning systems. The UK has proposed the IMF and the FSF as good locations for an early warning system; South Africa favours the IMF for this task. The idea of an early warning system has been discussed and promoted for a long time. Although it is something everybody agrees on in principle, it is still unclear how an effective warning system could be put in place and what it means in concrete terms.

In terms of issues the IMF should focus on, the UK mentioned the "risks arising from global imbalances", i.e. the US deficit and China’s low exchange rate. The UK also emphasised the importance of independent macroeconomic surveillance by the IMF. In line with this, Canada wants to strengthen the IMF’s role in preventing future crises and in surveillance. Both the UK and Canada want to require governments to respond to IMF surveillance reports and policy advice, having in mind countries’ current account surplus. China emphasised that the IMF’s oversight over macroeconomic policies of countries that issue reserve currencies should be strengthened including publishing the information and improvement recommendations, having in mind countries with current account deficits such as the US.

The US wants the IMF to report quarterly on member countries responses to the crisis, namely fiscal stimuli and monetary policies. It favours the IMF recommendation to spend 2% of a country’s GDP annually for fiscal stimulus as a benchmark. The European countries have reacted negatively to this proposal, being very reluctant to agree to more measures aimed at boosting demand (in Germany the  stimulus package is about 1.5% of GDP, in France it is 0.75%, in the UK 1.4% and likely to fall to minus 0.1%), whereas China and Saudi Arabia might be more inclined, currently planning to spend 2% and 3.3%  of their GDPs respectively.

Indonesia opts for a new liquidity instrument without conditionality for countries with a good ‘policy record’. This is likely to be agreed on in broad form by the G20, leaving the details of facility design up to the IMF.

South Africa wants the role of the IMF in coordinating financial regulation to be strengthened.

World Bank governance and resources

Regarding World Bank governance, some countries again favour an increase of representation of developing countries and emerging markets, and a better reflection of their concerns (Indonesia, China, Japan, EU, South Africa). Exact details of the voting changes will likely be left to the World Bank’s existing internal process which is due to conclude at the latest by early 2010.

World Bank resources and role

China said in its statement in the General Assembly that the World Bank should mobilise more resources to help developing countries meeting the MDGs. Canada will pressure emerging economies to contribute a greater share to the next IDA replenishment. The US solely stated that "the World Bank and other Multilateral Development Banks must more effectively leverage existing resources by being flexible in using their balance sheets."

Regarding its role, the World Bank itself has repeatedly proposed a "Vulnerability Fund" to help developing countries cope with the crisis; the UK wants the G20 to provide $5 billion for this fund and has committed itself to provide $250 million. Canada’s focus lies on the Bank help for crisis hit developing countries, especially putting safety nets into place. South Africa wants the Bank to have more flexibility regarding its products, i.e. less administrative hurdles etc. for developing countries. Similarly, the Netherlands called for increased flexibility for Bank lending.

Japan pressures to increase the role and power of the Japan dominated Asian Development Bank (ADB) vis-à-vis the World Bank, where the ADB has views on conditionality, World Bank governance etc. similar to those held by civil society. India wants a 200% increase in its Asian Development Bank subscribed capital.

FSF governance and role

Regarding FSF governance, the previous G20 communiqué calls for a broadening of the membership to include emerging markets, and expanding the outreach to non-members; the US endorses membership of all G20 countries. The FSF is currently working on a proposal for increased membership. Australia acknowledged that the FSF is not representative enough and therefore sometimes lacked "policy context".

Regarding the FSF role, the UK wants to give the FSF a formal role in coordinating work and provide guidance for work of standard setters, regulators, and supervisors in main financial centres, and bring regulators together in the case of a crisis. Canada wants the FSF and IMF to oversee international banking regulation and thinks it is already equipped for that. The US wants to endow the FSF with a stronger mandate allowing it to promote standards and work closer with standard setting bodies.

Arrangements for global governance

G8 and G20

Regarding the role and importance of the G8 and the G20, countries seem to favour different options. Canada seems to opt for the co-existence of the G8 and G20. If a Liberal government would come to power, there might be a greater shift towards the G20. Japan opts as well for co-existence, seeing the G7/G8 on charge of development and finance and the G20 dealing with climate change and changing global governance. Japan argues that emerging markets are not ready to take on critical responsibilities and that the G20 is too big for dealing with the financial crisis. Instead, the G7/G8 should lead on that with some additional countries.

The UK, on the other hand, wants to give the G20 a permanent secretariat to make it a powerful body for overseeing global finance. Australian Prime Minister Kevin Rudd emphasised that the G20 should increase their input into the work of the IMF and the FSF, because they have the political authority which the IMF and FSF are lacking. In this context he spelled out that the G20 is "sufficiently representative" as opposed to the FSF.

This has been opposed by the G77, stating that dealing with the crisis must happen in a UN led process, because the G20 lacks legitimacy. In line with that, China also favours inviting regional organisations such as the African Union to the London summit. The EU mentioned that the "concerns of developing countries should also be properly represented in (…) the G20". It also welcomes the idea of a UN conference on the development impacts of the current crisis.

Regional cooperation

Chinese Premier Wen Jiabao encouraged regional monetary and financial cooperation and funding mechanisms. Similarly, Russia seems to favour regional cooperation rather than international.

New (global) institutions?

German chancellor Angela Merkel proposed an Economic Council similar to the Security Council but did not specify how this council would look like and who would be a member. Linked to this, she opted for an Economic Charter that sets out by which principles a global economic and financial system should be governed. Since this idea has not been picked up by anybody, it seems very unlikely in the near future.

The monetary system

The UK has mentioned the "risks arising from global imbalances", i.e. the US deficit and China’s low exchange rate. The UK also emphasised the importance of independent macroeconomic surveillance by the IMF. In line with this, Canada wants to strengthen the IMF’s role in preventing future crises and in surveillance. Both the UK and Canada want to require governments to respond to IMF surveillance reports and policy advice, having in mind countries’ current account surplus.

China emphasised that the IMF’s oversight over macroeconomic policies of countries that issue reserve currencies should be strengthened including publishing the information and improvement recommendations, having in mind countries with current account deficits such as the US.

UNCTAD issued a policy brief in December 2008 stating that "multilateral or even global exchange rate arrangements are clearly necessary to achieve and maintain global monetary and financial stability." The idea to return to globally managed exchange rates is however unlikely to find backing among the G20 with Western countries preferring floating rates and Asian countries sceptical of the IMF overseeing such arrangements fairly.

Financial regulation

Scope and scale of regulation

Several countries have expressed their will to close regulatory gaps regarding the shadow banking system. All financial products and institutions shall be brought under regulation (China, EU leaders in a joint statement). China explicitly mentions hedge funds’ leverage and pay system. Canada has apparently not yet an agreed position on the scope of regulation, compensation packages and risk management. Although the UK stated that it should "move forward by (…) closing gaps in regulatory structures and restricting the scope for the emergence of shadow banking systems" , its commitment to tighter regulation seems fairly limited. Gordon Brown said in his speech in the US that the financial system would be better if the world would "outlaw shadow banking". Hedge funds and derivatives trading are also dealt with at a European level.

The IMF proposed a new system of oversight of those hedge funds and private-equity funds whose failure would have a systemic impact. Whereas the IMF suggested higher capital requirements for these institutions, the US Federal Reserve Chairman Paul Volcker, one of Obama’s advisors, proposed restrictions on high-risky activities. In general, the US seem very sceptic towards tighter regulation, stating only vaguely that no "systemically significant financial institution, market or product" can any longer "escape proper oversight", specifically mentioning derivatives.

South Africa stated it supports measures that penalise risky behaviour, i.e. measures that discourage short-term speculative investment behaviour and other practices that have contributed to recent economic shocks.

Cross border cooperation

Furthermore, several countries have called for better cross-border cooperation of supervisors and regulators (UK, China, Germany). The UK called for mechanisms for cooperation in the case of crisis (see UK position on FSF role), and a mechanism to manage failed institutions, as well as to protect depositors and consumers. The UK argued for concerted fiscal policy but did not propose anything concretely. China said that national financial authorities should increase the exchange of information, the monitoring of global capital flows, and prevent cross-border transmission of risk. Similarly, South Africa called for greater information sharing and agreed interventions, especially among G20 countries.

Furthermore, the UK government and the IMF favour colleges of supervisors for banks operating across borders which everybody seems to agree to, although details are not spelled out yet.

A new global regulator for banks?

UK Prime Minister Gordon Brown called for a super-regulator to monitor the world’s leading 30 banks, a proposal that clearly goes beyond the idea of supervisory colleges. Canada opposes the idea of a global financial regulator and favours the FSF and IMF to oversee banking institutions. It noted, however, that an international surveillance body (namely the IMF) should be assigned this year in order to restore confidence in banks, although each country must get its own financial system in order. The creation of a global regulator seems unfeasible, because the US and China will not give up sufficient national power to do so. Especially, since the crisis is framed as a matter of economic security and hence national security.

International standards

Furthermore, the several countries want a reform of the current capital requirements and their pro-cyclicality (UK, US, China). It is likely that the G20 will express its desire for counter-cyclical capital adequacy provisions, but will leave it to the Basel committee to propose exact formulas.
Regarding international regulatory and accounting standards in general, Canada has referred to already existing standards and that emerging economies and other countries should sign on. South Africa called for a broad set of principles to underpin a strengthened architecture of global supervision and regulation.

The US also mentioned standards regarding money laundering and terrorist financing.

The US stated that in the long run standard setting bodies should be regrouped reflecting prudential oversight, market conduct and integrity, and macro-prudential oversight.

Tax havens

The UK, Germany and France claimed that they want to address the problem of off-shore jurisdictions/tax havens, and the UK specifically attacked Switzerland (not represented at the G20). The US administration just recently endorsed anti-tax havens legislation and stated to "crack down on those who use offshore tax havens". Apparently, the G20 is creating a blacklist "from three overlapping groups of havens: those which still have no double taxation conventions, which allow nations to swap information on taxpayers in each other's jurisdiction; those which have refused to accept the idea of new Tax Information Exchange Agreements, which allow one nation to require another to dig out extra information on a suspect; and those which agreed in principle to TIEAs but have failed to sign them".

Several of tax havens such as Switzerland and Luxembourg have already expressed their concerns for a "brushing all" approach of the G20. Liechtenstein has recently committed to OECD standards on tax transparency and data exchange in order to be removed from the OECD blacklist; and Jersey is going to sign a bilateral agreement with the UK on information exchange mid March.

It remains unsure, how far a shift in policy regarding tax havens will go. Eleven of the world’s 37 suspect jurisdictions are linked to the UK according to tax monitoring organisations.

Development finance

Regarding aid, UK Department For International Development (DFID) has stated that the new architecture must suit developing countries’ needs, i.e. access to finance and development of the financial sector. Similarly, the World Bank should promote private sector growth, including the financial services sector.

Several countries promote an increase of aid: Indonesia, as mentioned in the first paragraph, argue that the World Bank and other Development Banks should increase their lending capacity. China calls for preferable loan conditions and timely assistance of IFIs, and increased aid and regional efforts to help developing countries. Australian Prime Minister Kevin Rudd stated that Australia increases its ODA to 0.5% of GNI by 2015. Canada said it remains committed to increase its aid levels by 8%.

Indonesia has called for a Financing Support Mechanism for development in emerging markets but did not say how this should be organised. South Africa also called for emergency liquidity and standy-by arrangements for low-income countries that face exogenous shocks.

Regarding debt, Indonesia spends nearly 30% of its state budget on debt servicing. Russia might consider a debt relief for neighbouring countries. South Africa stated that donor countries should recommit to promises regarding aid and debt relief. Especially, it should be ensured that developing cuntries with weak balance sheets are not unfairly penalised by the crisis.

Trade

Regarding trade, several countries emphasised that protectionist policies need to be avoided and that finishing the Doha Round is crucial (EU, UK, Indonesia, China, Canada, Germany, G7, US, Brazil); many of the participating countries want to finish the negotiations end of 2009. However, China pointed once again to regional economic integration as a supplement to the multilateral trading system, and called for a "balanced outcome" of the Doha round. It stated that any trade relief activity opposed to WTO rules is considered protectionist and hence to be avoided. Turkey opts for closer trade relationships with the Central Asian region and Middle East, not only EU and Russia. Russia is still not member of the WTO due to US opposition. The UK mentioned the volatility of commodity prices as a problem, but just called for greater efficiency.

The EU stated that a more active role of least developed countries in WTO trade negotiations is supported. South Africa emphasised that Doha outcomes need to be developmental, i.e. create policy space for new industrial development, support employment and vulnerable sectors, and expand decent work opportunities in local economies.

The US proposed the idea of a global trade finance initiative bringing together bilateral and multilateral institutions in order to attack risk and liquidity issues hampering trade.

Environment

Regarding the environment, Japan pushes for differentiation, isolating China and India from the developing country camp; it calls for voluntary mitigation targets of developing countries. Japan does not accept 1990 as base year for mitigation targets since it is advantageous for Europe. South Africa stated that financing climate change adaptation needs to come from additional resources, not ODA.

Economic recovery

The US expressed the need for a framework for immediate financial sector actions covering the provision of liquidity and funding, recapitalizing firms, and addressing the problem of legacy assets.

Likely outcomes

In general, it remains unclear how much concrete will be agreed upon at the summit. Chairman of the US Federal Reserve Ben Bernanke said the G20 should rather come out with "principles" not direct proposals, whereas UK Chancellor of the Exchequer Alistair Darling wrote that the G20 needs to "go beyond discussions about principles and make concrete commitments".

Given the countries positions, several things seem likely to be agreed on:

• enhanced information sharing among national regulators and supervisors, and the establishment of colleges of supervisors,
• increased resources for the IMF,
• agreement that the IMF and World Bank need changes in voting rights and shares without more specification,
• further development of international standards, maybe some changes regarding the IMF's and FSF's role in promoting those standards,
• emphasis on the establishment of an early warning system involving probably the IMF,
• and increased lending of the WB but probably not unconditional.

It still seems quite unclear how much concrete will happen regarding

• macroeconomic surveillance by the IMF,
• tax havens,
• closing regulatory gaps and shutting down the shadow banking system,
• the role and outreach of the G20,
• trade,
• and the global monetary system.

Acknowledgements

The paper has been written by Barbara Sennholz.

A large number of people provided help, vital information, comments and support for this paper. Acknowledgements are due to Kato Lambrechts, Fraser Reilly-King, Peter Wahl, Patrick Bond, Peter Chowla, Yoke Ling, Dorothy Guerrero, Nikmah, Umit Ozlale, Riaz Khalid Tayob, Chris Wangkay, Erinc Yeldane, Max Lawson, Louise Deady, Burghard Ilge, Selcuk Caner, and Takumo Yamada.

1. HM Treasury (12/2008) Managing the global economy through turbulent times.

Related resources

• rethinkingfinance.org Alternative voices for a new financial architecture Resource|Rethinkingfinance|13 March 2009|Website|URL

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