While the G20 summit is almost certain not to create a new “Bretton Woods” system overnight, countries led by Britain and France want an enhanced role for the International Monetary Fund, to improve surveillance of complex financial markets and help prevent such excesses building up in future. They also favour increased funding for the IMF.
Gordon Brown made well-publicised efforts to persuade Gulf states to make large contributions to its coffers, while there is also pressure on China, and Japan has pledged $100bn of reserves.
The additional money would enable the IMF to finance more bail-outs to countries suffering runs on their currencies and banks.
The US is less keen on this because new streams of funding would dilute its voting rights within the Washington-based institution.
Similarly, the keenness of oil-rich Gulf states to contribute will be tested now that oil prices have more than halved from their summer peaks.
There is a widespread recognition that regulation of financial markets has been far too weak in recent years. Authorities have been increasingly aware of the excesses building up in such markets, like those for mortgage-backed securities, but have failed to increase regulation.
There is also, though, a recognition that too hasty regulation in response to a crisis, like that of the Sarbanes-Oxley Act brought in by the US Congress in 2002 in response to the Enron scandal (and designed to improve corporate responsibility and combat corporate and accounting fraud), could be counter-productive.
So, there will be discussion of a new global regulator that can force banks and hedge funds to be more transparent about their borrowings and their investment positions.
Such an organisation would force banks to hold greater capital cushions or make them pay bonuses in shares that would have to be held in a company for, say, five years, to make sure it was the longer-term interests of the shareholders that was the focus rather than the bankers’ own short-term interests.
There is also discussion of a temporary suspension of “mark to market” accounting rules under which banks are required to report the current value of their assets at times when pricing those assets – such as sub-prime mortgages – is virtually impossible.
Recapitalisation of banks
This is already happening around the world, with most countries following the British model. The US government announced changes to its $700bn bail-out for its banking system on Wednesday, under which it will buy fewer toxic mortgage-backed securities from banks and instead recapitalise banks by buying shares.
This weekend’s G20 meeting will discuss a possible response to the problem of banks running out of capital – which probably would be based on a Spanish-style system whereby banks have to hold a bigger capital cushion in good times, which they can draw upon in bad times.
Building such a system will not happen overnight but G20 leaders will probably commit themselves to such action. There is also likely to be discussion of new rules to simplify derivatives products and improve the transparency of the markets in which they are traded.
One aim of the G20 summit is to coordinate global action on interest rates in an effort to pump some life back into the world economy and avoid deflation, or falling prices.
Most governments have already begun to cut and many are also either embarking on, or considering, tax cuts or spending increases to help reflate countries’ economies – especially as the impact of interest rate cuts in many economies is being hampered now by the poor availability of credit.
Brown is trying to lead globally coordinated tax cuts. But public deficits in Britain have grown so large in recent years that the country is one of the worst-placed of the main economies to afford a big fiscal giveaway.
New world order
Recent decades have been dominated by western industrialised nations grouped together under the banner of the Group of Seven, but the summit, this weekend, billed as G20, marks a significant shift.
Large-scale economies such as China, India and Brazil now have a place at the table and are demanding a much greater say in global economic oversight because they consider the old “Anglo-Saxon” free-market dogma to be dead.
Reflecting this shift, Brown has indicated that it could be possible to get an agreement on the Doha round of trade talks, which collapsed in Geneva earlier this year amid bitter recriminations between the US and India.
The French president, Nicolas Sarkozy, for his part, will use the summit to suggest that the days of the dollar as the world’s reserve currency are over.
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