G20 Early Post-Mortem

The G20 issued a statement that threw its collective weight—accounting for almost nine-tenths of the world’s GDP—behind pro-growth and pro-trade policies. The attendees broadly agreed to take additional fiscal and monetary measures and pledged not to impose new trade barriers. This is the most that could have reasonably expected.

Leaving aside the UK’s recent use of anti-terrorist measures to freeze assets of a bank from fellow-NATO member Iceland, there appears to be a heightened cooperative spirit, but that is not the same as coordination. The G20 statement seemed to smooth over differences by explicitly stating that the crisis “first and foremost” a national responsibility.

And this is not very new or inspiring. Many countries have already taken monetary and fiscal measures. More measures are widely anticipated. *

There were a couple of other actionables coming from the G20 meeting. First, they tentatively agreed to meet again by May. Second, they agreed to a March deadline for recommendations of reform—seeking to strengthen accounting standards, and oversights of derivatives, hedge funds and rating agencies. Third, as expected, there were efforts to give the IMF a bigger role. Japan had indicated prior to the G20 summit that it would help boost the IMF’s lending capacity to $300 bln from $200 bln. The IMF has committed itself to $40 bln in new programs over the last couple of weeks ($7.6 bln for Pakistan, $15.7 bln for Hungary and $16.4 bln for Ukraine) and another $4 bln (for Iceland and Belarus) appears to be in the works.

Taken as a whole, it does not appear that the outcome of the summit will be sufficient to stem the financial crisis. This was a high bar from the start. As the financial crisis continues, the de-leveraging and portfolio liquidation process will likely continue to exert upward pressure on the US dollar and Japanese yen. Lastly, in this environment, we expect pressure to remain on emerging market currencies. The volatility and risk aversion remains a significant deterrent against picking a bottom, even if interest rates and valuation models make them as a group appear to be relatively cheap.