G20 meeting in Pittsburgh
BACKGROUND: Long known as the Steel City, Pittsburgh witnessed the collapse of its signature industry in the early 1980s only to transition into one of the country's top centers for life science research and technology, and one of America's "greenest" locales. Urban leaders around the country are turning to Southwest Pennsylvania as a successful case study in building a new economy. As the world converges to discuss issues pertaining to the recovery of the global economy, the Summit will be hosted by a city that is a microcosm of the solutions needed worldwide.
G20 plans for stimulus exit
By Ralph Atkins in Frankfurt and Norma Cohen in London
Published: September 3 2009 19:51 | Last updated: September 3 2009 21:26
World leaders have set out the first steps toward withdrawing emergency support for the global economy even t
hough they warned that the crisis was not over. On the eve of Friday’s meeting of G20 finance ministers to prepare for a summit on financial regulation later this month, the US, UK, France and Germany called for work to start “on exit strategies to be implemented in a co-ordinated manner as soon as the crisis is over”.
Tim Geithner, US Treasury secretary, said finance ministers should start to spell out how the “very successful policy response” to the economic crisis could be reversed. Speaking at the US Treasury before flying to London to meet his counterparts from the Group of 20 nations, Mr Geithner said these exit strategies were “very important to [the] confidence” of the financial markets. The London meeting will be followed by a summit in Pittsburgh, hosted by President Barack Obama, on September 24-25.
Jean-Claude Trichet, European Central Bank president, writing in Friday’s Financial Times, has outlined for the first time the principles the ECB would use to unwind the exceptional steps it has taken.
The calls highlight how the policy debate has switched from crisis response to presaging a return to normal conditions.
A recovery in the world’s economy now looks likely to come earlier than had been expected a few months ago, the Organisation for Economic Co-operation and Development said on Thursday. But it warned that a return to normal conditions would be slow and protracted.
The UK’s recovery was slower than the global recovery partly because of its heavy specialisation in financial services, said Jorgen Elmeskov, acting head of the OECD’s economics department. The global recovery was being led by the manufacturing sector.
Mr Elmeskov said the UK’s ability to stimulate demand had been constrained compared with other countries.
Mr Trichet, in his FT article, stressed that it was “premature to declare the financial crisis over”. The ECB sees a bumpy road ahead for the eurozone and is wary about global prospects, especially if the US rebound disappoints. The ECB left its main interest rate unchanged at 1 per cent on Thursday.
Europe has mapped its monetary exit
By Jean-Claude Trichet
Published: September 3 2009 19:35 | Last updated: September 3 2009 19:35
Exceptional times call for exceptional measures. The European Central Bank, like other central banks, has introduced non-standard measures to tackle the financial crisis and cushion its impact on the economy – what I call “enhanced credit support”. These have contained the threats to the stability of the euro area’s financial system and supported the flow of credit to companies and households over and above what could be achieved through interest rate cuts alone.
Because of their exceptional nature, these measures will have to be unwound once economic and financial conditions normalise. We at the ECB designed the non-standard measures with our exit strategy in mind, and we are ready to implement this strategy when the appropriate time comes. Stressing the importance of the exit strategy should not be confused with its activation: it is premature to declare the financial crisis over. Today is not the time to exit.
Four issues will shape our approach to exiting the non-standard measures.
First and foremost, should the non-standard measures trigger risks to price stability, we will immediately begin to unwind them and ensure the continued solid anchoring of inflation expectations. The timing and sequencing of our exit strategy depends on our real-time assessment of the economic outlook and the health of the financial system in line with our contribution to financial stability.
Second, a degree of phasing out has been built into the exit through the design of our measures. In the absence of new policy decisions, several of these measures will unwind naturally. Given that the overwhelming majority of the liquidity has been provided through repurchase agreements, a new policy decision would be necessary in order to roll these operations over once they mature.
Third, the ECB’s operational framework is well equipped to facilitate the unwinding of non-standard measures as the need arises. This framework comprises a varied and flexible set of instruments, including fine-tuning operations, allowing the absorption of surplus liquidity – promptly, if necessary. Moreover, with its interest rate corridor, the framework allows short-term interest rates to be changed while keeping some non-standard measures in place, should continued credit support be needed. The governing council can therefore choose the way in which interest rate action is combined with the unwinding of the non-standard measures.
Fourth, the outright purchases of securities by the eurozone’s central banks have been measured in both scope and volume. They have focused on the market for covered bonds and have acted only as a catalyst. We opted for a purchase programme with a volume that was significant enough to improve the activity and functioning of the market, but not so large as to dominate the market or the balance sheets of eurozone central banks. The measured programme facilitates its future unwinding or its offsetting by other policy operations.
With regards to future actions, we are unrestricted in our ability to take decisions, given the strong institutional independence of the ECB. This reflects the clear dividing line in the euro area between the responsibilities of the central bank and those of the fiscal sphere. That the ECB has not purchased government bonds is in line with this institutional framework.
The ECB has an exit strategy from its non-standard measures in place. Its implementation will build on three self-reinforcing elements: credibility, alertness and steady-handedness. These form the basis for the strong anchoring of inflation expectations in the euro area – our main asset. This strong anchoring is based on our determination and ability to act decisively whenever the need arises. The ECB’s governing council will continually assess whether policy adjustments are necessary and implement those adjustments to maintain price stability in the euro area over the medium and longer term.
Our fellow citizens can have full confidence in the determination and ability of the ECB to deliver price stability. This confidence will, in turn, contribute to a sustainable recovery.
Letters: G20 must bring banks’ bonus culture to an end
Published: September 4 2009 01:07 | Last updated: September 4 2009 01:07
From Ms Christine Lagarde and others.
Sir, Nearly a year ago, the fall of Lehman Brothers dragged the world into an unprecedented financial crisis. Overnight, we were forced to question our beliefs about the solidity of our financial institutions and the functioning of a financial system that was constantly reinventing itself. Very quickly, entire sections of our national economies were brutally hit.
We now know all too well the reasons for the crisis. It originated in the US real estate sector but soon affected the whole financial world due to massive securitisation. This crisis is the result of overly-complex financial instruments, lack of risk evaluation, insufficient regulation of some players and some products, and the insatiable greed of other players, for whom enough was never enough.
Against this challenge, the states staved off collapse by mobilising the necessary means. We provided exceptional support to our financial sectors. We instigated massive recovery plans – totalling nearly $5 trillion worldwide, according to the IMF.Although each state acted as it saw fit and according to its own priorities, there was unprecedented international cooperation and coordinated action. This is what set this crisis apart from the one the world experienced in the 1930s.
Last April, the heads of state and government of G20 countries representing 85% of the world’s wealth met in London and drafted rules to deal with the roots of the problem. The decisions that were then adopted were designed to eliminate the causes of the crisis through greater transparency, increased regulation and responsible behaviour on the part of stakeholders. They offer a response to the legitimate demands of our fellow citizens, who seek greater supervision and, in the absence of certainty, at least guarantees that these failings will not recur.
As representatives of these countries, it is our duty to fully implement these decisions to do everything within our power to eliminate risky behaviour and put an end to destructive irresponsibility by certain financial players.
Today, there are reasons to hope that the end of the turmoil is in sight. It is far too early to claim victory, but recent data and economic figures appear to indicate that the worst of the financial crisis is behind us. Although the economy is not recovering as quickly as we would like it to, we are encouraged that positive signs are starting to emerge.
At the same time, however, we have to prevent some financial stakeholders from reverting to harmful practices. Banks – some of which owe their very survival to massive injections of public monies – are taking advantage of good results for the first quarter to pretend that the crisis was only a minor setback, and that they can return to business as usual. We must be very clear: these practices are not only dangerous, they are improper, cynical and unacceptable. They constitute a provocation in face of rampant rising unemployment.
We do not choose to put our money in banks. We have to. Banks play an essential role in our economic system, and we must ensure that they obey rules and are never again in a position to put the entire system in jeopardy. Risks associated with compensation schemes must be supervised very strictly. The danger is far too great when the mistakes of a few can affect all of our populations.
This is why, at today’s G20 Finance Ministers meeting in London, we will call for a strict compensation policy to be put in place. Guaranteed bonuses for more than one year should be prohibited. Bonus payments should be spread out over a few years and paid bonuses should reflect the individuals and banks’ true performances over time.
Banks must also offer complete transparency by publishing detailed information about their compensation policy. Finally, each country must make sure that’s its banks are compliant with these rules.
In addition, the public opinion in our countries finds it hard to understand how so few can claim so much. The amount of some of the bonuses raises real questions, and not only including from a moral point of view. We recognize this isn’t an easy debate but it is one we can’t escape. Proposals have been made to go further, including capping bonuses, possibly taxing them, or imposing additional obligations to banks.
It is clear that these rules are the first part of a larger set of necessary regulation in the financial sector. In addition, given the bold decisions taken by governments and central banks, which were decisive in bringing back bank profits, we expect equally bold moves in the banking sector to use these profits to the benefit of the real economy.
Today, we have a unique opportunity to act decisively to protect our citizens and ensure that our economies run smoothly.
We have already begun to take action and we are determined to continue. We call on our G20 colleagues to join us in adopting strict rules. Clearly, it will be all the more effective if adopted at an international level.
Let us pursue the historic efforts undertaken on 2 April. Together, let us lay the foundations of a sustainable growth built on the principles of transparency and responsibility. The bonus culture must come to an end and it must end at the G20 meeting in Pittsburgh.
Anders Borg,
Minister of Finance, Sweden
Wouter Bos,
Minister of Finance, The Netherlands
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