cumbrewash.jpgWith the overblown headlines and triumphant images having just faded away, it is necessary to analyze in detail the general strategy and tactical work plan to come out of the global summit held to calm the financial chaos and the global recession.

(From Madrid) WE ARE COMMITTED TO ENHANCE our cooperation and work together to restore global growth and achieve needed reforms in the world’s financial systems. The G20-plus-two-guests summit lasted six working hours, during which there was only time to hear a succession of speeches, while behind-the-scenes work ensured the drafting of a rather more extensive and detailed final communiqué than usual, as to correspond with the alarming economic situation that the world is experiencing. In contrast to the troubling news feeding the current global economic recession daily, the G20’s prescription is to seek consensus in order to improve the existing conditions.

It does not create new international organizations, but rather it reforms the current ones and grants emerging and marginalized countries a greater presence. There is nothing about a global government or a financial super cop; not even one mention of the UN. It does not condemn capitalism, but instead it tries to preserve its virtues. No more protectionism, but a freer market. Nobody is squarely blamed for the crisis. The financial superstructure that dominates the world is not condemned. There is no clear proposal for an increase in public spending. It was a markedly reformist and moderate meeting to reassure humanity and offer a semblance of a certain global coherence, that the chaos stirring up trouble on the surface belies a certain internal order, perhaps already providing a faint glimpse of that New World Order that was first predicted during the end of the last century.


The participants have signed a long and detailed document -I would say the most coherent one in recent times- in order to ensure that its joint objective is to lay the foundation for reform to help to ensure that a global crisis, such as this one, does not happen again, an objective guided by a shared belief (in) market principles, open trade and investment regimes, and effectively regulated financial markets. Note that it only says lay the foundation for a reform that obviously cannot come out of a protocol meeting, a ritual of exorcism to provide some chemical balance to the collective bipolar disorder afflicting the planet.

The joint communiqué starts by explaining the current crisis, a fact that we should be grateful for: During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions. The explanation appears to be complete and acceptable, although the responsibility is – unjustly? – spread among all market participants, and not placed on the shoulders of this one or that one, but of everyone, from the president of Lehman Brothers to the last beneficiary of an impossible-to-return loan.

But, in reference to the root of the problem, the unnameable is named: the pursuit of higher yields without an adequate appreciation of the risks. In other words, greed, and so much of said sin that it recently grew to be unbearable. Additional sins are also identified in risk management, uncontrolled financial products, and that massive and epidemic leverage that has led to widespread doubt and to us taxpayers and governments still having to trust banking and financial institutions today that do not even trust each other.

There is also a strong critique of policy-makers, regulators and supervisors, in some advanced countries. Notice how it does not only point a finger at the United States, which is what some wanted, although in all respects would have been unfair. And understand that when it says some countries it really means practically every country.

What’s more, it points out major underlying factors of the grave current situation as, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes.


The communiqué states that a broader response to restore growth, avoid negative spillovers and support emerging economies and developing markets is needed. This would mean stabilizing the financial system; applying a monetary policy support tailored to each case; employing fiscal measures to rapidly stimulate domestic demand without abandoning fiscal sustainability; ensuring emerging and developing countries access to the finance in the current difficult conditions, including through liquidity facilities and program support; strengthening the IMF with its new short term liquidity facility and maximum flexibility; “Political leaders, who are regaining their leadership, which had been eclipsed for almost two decades by financial leaders, give the latter a little slap on the wrists” completely mobilizing the World Bank and other multilateral development banks (MDBs) in support of their development agenda and the financing of infrastructure and trade; and equipping all these multilateral institutions with sufficient resources. This means that there is no general cure, but instead the particular employment of classic monetary and fiscal mechanisms where possible and necessary. However, it stresses the importance of ensuring that emerging countries do not lack credit, through a restrengthening and relaunching of the IMF and the World Bank.

For the moment there will not be a global regulatory authority, which is tempting but easier to preach than it is to put into practice. It reminds us that strengthening the financial markets and regulatory regimes, is first and foremost, the responsibility of (the) national regulators, although given that our financial markets are global in scope, an intensified international cooperation between regulators must be applied, and international standards must be strengthened where necessary. Only where necessary. This is something that will be established in the upcoming months.

Political leaders, who are regaining their leadership, which had been eclipsed for almost two decades by financial leaders, give the latter a little slap on the wrists: “The summit of a decade ago created the G-20, promised to reform the IMF – something that has hardly been addressed – and created this Forum, which has been rather mediocre until now” Financial institutions must also bear their responsibility for the turmoil and should do their part to overcome it including by recognizing losses, improving disclosure and strengthening their governance and risk management practices. There are few obligations for the global predators, who are surely already devising new diabolical inventions for the most lucrative of activities: those that involve the least amount of risk and the most gains.

The signing governments commit to implement policies consistent with the following common principles for reform: strengthening transparency in the financial markets (including that which states incentives should be aligned to avoid excessive risk-taking), improving regulation with a strong oversight over the credit rating agencies, the development of an international code of conduct, protecting the integrity of the financial markets, increasing cooperation in order to oversee the movement of capital across borders, and reforming the international financial institutions created at Bretton Woods, as well as the Financial Stability Forum (FSF), giving a greater voice and representation to emerging and developing economies.

Let’s remember that the FSF was created at the behest of the G-7 in another dramatic summit ten years ago, which was held in response to the Asian crisis, in order to bring the rest of the international organizations together in an institution in charge of matters of international finance stability. It hasn’t done a bad job over the years, but it is an organization with little structure, based on intergovernmental cooperation that, above all, has a serious legitimacy problem: it is a G-7 creation, expanded -capriciously – to include the Netherlands, Australia, Hong Kong, Singapore, and Switzerland. The summit of a decade ago created the G-20, promised to reform the IMF – something that has hardly been addressed – and created this Forum, which has been rather mediocre until now, perhaps because it needed an emergency situation like the current one in order to take center stage.


The world leaders have delegated the real work to their Finance Ministers: putting lyrics to this music, which doesn’t sound out of tune, although yes, somewhat déjà vu: a little worn-out and a little trite. We instruct our Finance Ministers, as coordinated by their 2009 G-20 leadership (Brazil, UK, Republic of Korea), to initiate processes and a timeline to do so. An initial list of specific measures is included in the Action Plan to be completed prior to March 31, 2009. We will meet again by April 30, 2009, to review the implementation of the principles and decisions agreed today . That’s four and a half months for the technical conversations, one more month for the definitive drafting, and five and a half months for a new summit that, if all goes well, will pass the global action plan. Mind you, a plan that throws out any protectionism and sanctifies the current capitalist system.

“The Millennium Development Goals and commitments for development assistance are, at least formally, not forgotten” This plan calls special attention to the commitment to an open global economy and textually cites free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. Regarding this last point, it warns: Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows. In other words, it calls for more regulation, but not much regulation. We’ll just have to wait and see what happens.

And just in case there was any doubt, the 13th point says: We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome. Hence, the utter distaste for the temptation of protectionism is unanimous and unequivocal.

However, the Millennium Development Goals and commitments for development assistance are, at least formally, not forgotten: We reaffirm the development principles agreed at the 2002 United Nations Conference on Financing for Development in Monterrey, Mexico. And, at least theoretically, the commitment to address other critical challenges such as energy security and climate change, food security, the rule of law, and the fight against terrorism, poverty and disease, is maintained.


As we say, it presents a rather detailed work plan up until March 31. In consultation with other economies and existing bodies, drawing upon the recommendations of independent experts, we request our Finance Ministers to formulate additional recommendations in these areas: mitigating against pro-cyclicality in regulatory policy; reviewing and aligning global accounting standards, particularly for complex securities in times of stress; strengthening the resilience and transparency of credit derivatives and reducing their systemic risks, including by improving the infrastructure of over-the-counter-markets; reviewing compensation practices as they relate to incentives for risk taking and innovation; reviewing the mandates, governance, and resource requirements of the IFIs; and defining the scope of systemically important institutions and determining their appropriate regulation or oversight. “As for oversight, regulators must ensure that credit rating agencies meet the highest standards and avoid conflicts of interest”

Without a doubt, the majority of the problems fall under a reformist approach, and not one focused on explicitly breaking with the past. In order to provide the system with more transparency, in the short term this involves the key global accounting standards bodies improving the adequate valuation of securities, including complex, illiquid products, especially during times of stress. This includes the initiation of an accounting standardization in order to identify the differences and disclose the off-balance standards, improving the identification of the most complex financial instruments issued by firms to market participants, and improving the regulatory bodies themselves including by undertaking a review of its members, in particular in order to ensure transparency and accountability. Also, private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices.

In the medium term this means creating a single, global, high quality norm. Additionally, financial institutions should provide enhanced risk disclosures in their reporting and disclose all losses on an ongoing basis, consistent with international best practice, as appropriate. Regulators should work to ensure that a financial institution’s financial statements include a complete, accurate, and timely picture of the firm’s activities (including off-balance sheet activities) and are reported on a consistent and regular basis.

Detailed short and medium term timetables are also established in order to solve problems related to improving regulation, prudential oversight, risk management, promoting integrity in financial markets, reinforcing international cooperation, and finally to reforming international financial institutions.

Regarding improving regulation, it immediately calls for the IMF, expanded FSF and other regulators and bodies, to develop recommendations to mitigate the pro-cyclicality, including the review of how valuation and leverage, bank capital, executive compensation, and provisioning practices may exacerbate cyclical trends. In the medium term, countries that have not already done so pledge to review and report on the structure and principles of their regulatory systems to ensure they are compatible with a modern and increasingly globalized financial system. “To reinforce international cooperation, major global banks should meet regularly with their respective supervisory colleges

As for oversight, regulators must ensure that credit rating agencies meet the highest standards and avoid conflicts of interest. Authorities should ensure that financial institutions maintain adequate capital in amounts necessary to sustain confidence. International standard setters should set out strengthened capital requirements for banks’ structured credit and securitization activities. Efforts must be made to speed up the reduction of the systemic risks of CDS (credit default swaps) and expand the transparency of OTC derivatives.

In risk management, regulators should encourage financial firms to reexamine their internal controls and create strong liquidity cushions. Firms should reexamine their risk management models. The Basel Committee should help develop new models. Financial institutions should avoid compensation schemes which reward excessive short-term returns or risk taking. And in the medium term, authorities should monitor substantial changes in asset prices.

To promote the integrity of the financial markets, there must be an increase in cooperation on a regional and international level, and information sharing regarding domestic and cross-border threats. Furthermore, conduct rules, especially against market manipulation and fraud, must be reviewed. In case of misconduct, there should be an appropriate sanctions regime. The Financial Action Task Force should continue its important work against money laundering terrorist financing. And the exchange of fiscal information must be vigorously promoted.

To reinforce international cooperation, major global banks should meet regularly with their respective supervisory colleges. Regulators should improve the protocol for management and action in face of the risks they face, and prepare simulation exercises. Authorities should ensure that temporary measures to restore stability and confidence have minimal distortions and are unwound in a timely, well-sequenced and coordinated manner.

Finally, regarding the reform of international financial institutions, the Financial Stability Forum should be expanded immediately to include members of the emerging economies. The IMF should take a leading role in drawing lessons from the current crisis. We should review the adequacy of the resources of the IMF, the World Bank Group and other multilateral development banks and stand ready to increase them where necessary, and resume private capital flows which are critical for sustainable growth and development, including ongoing infrastructure investment. In cases where severe market disruptions have limited access to the necessary financing for counter-cyclical fiscal policies, multilateral development banks must ensure arrangements are in place to support, as needed, those countries with a good track record and sound policies.

We underscored that the Bretton Woods Institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. Emerging and developing economies should have greater voice and representation in these institutions. The IMF should conduct vigorous and even-handed surveillance reviews of all countries, and its role as a provider of macro-financial policy advice should be strengthened.


The American media has dismissed the meeting as a mere prologue to the one that will be held by April 30, this time with the assistance of Barack Obama. The British newspaper The Times takes for granted that this meeting will be held in London, since the United Kingdom will be chair of the G-20 next year.
Certainly, the summit conclusions represent only a guide for future meetings, in which the new American president will have an active role. In this sense, The Wall Street Journal has disclosed that the expectations of senior financial officials for the summit had fallen in the weeks leading up to it, due to Obama’s decision to stay on the sidelines. The New York Times adds, What remains to be seen is whether, working with a new White House, the leaders will cast aside their political and economic differences to embrace more radical changes. The Washington Post asserted that the gathering in Washington reflected the new balance of power emerging in the aftermath of a financial crisis that has devastated even well-run economies. “In many parts of the world there has been an increase in signs pointing to a profound economic slowdown”

The British press praises Gordon Brown’s success, just like the French press lauds Nicolas Sarkozy’s. The French president, who is also the acting president of the European Union (EU), believes that he has managed to get across the need for a concerted and coordinated relaunching, while the British Prime Minister, Gordon Brown, anticipates important announcements in a number of countries in the upcoming weeks.

However, as for the markets’ first reaction, those in the Gulf region – the only ones that are open on Sunday – fell, due to the poor global economic outlook. Dubai in particular lost 4.5 percent. European stock markets had fallen two percent by noon on Monday. It is obvious that the disease is serious, and a mere diagnosis is not enough; some medicine is needed.

In many parts of the world there has been an increase in signs pointing to a profound economic slowdown. Last week, the data showed that the euro zone is entering a recession, and other figures showed an increase in unemployment in the United States and other nations, and a slowdown in emerging economies. Japan’s economy, the world’s second largest, has also entered a recession for the first time in seven years, after shrinking 0.4 percent from July to September: two consecutive quarters of economic loss.

While the reunion took place, the IMF agreed to grant a loan of 7.6 billion dollars as part of a broader plan for Pakistan, where international reserves have fallen and the risk of suspension of payment has increased. In another sign of the magnitude of the crisis, India took new measures in order to increase liquidity in the exchange market and help exporters. And Citigroup will dismiss up to 50,000 employees in the next five or six months.

The G-20 has consolidated itself as the group that is most representative of the current world order, although its composition is not final. At the moment it groups the G-8 (Germany, France, the United States, Japan, Canada, Italy, Great Britain, and Russia), together with the European Union itself, and eleven emerging countries (Argentina, Australia, Saudi Arabia, Brazil, China, South Korea, India, Indonesia, Mexico, South Africa, and Turkey). Spain and the Netherlands, which are not a part of either of those two groups, also participated as a result of France’s invitation. And at least Spain wishes to remain, although the beginning has been especially difficult: no flag, no advisors, and no signature on the final communiqué.

Without a doubt, the EU is over-represented, in contrast to the United States or China. But the thing that is most noteworthy – yet receives the least amount of attention – is that the bloc of Iberian-American nations has burst onto the scene as a global power with such tact: Argentina, Brazil, Spain and Mexico can and should represent an important vector, a horizontal axis of coordination and a counter-weight to shift the balance towards the south. It is time for multilateralism under the guidance of the superpower: a two-legged western bloc that must hold talks with an emerging world. Undoubtedly, the world is changing: slowly and contradictorily, as it has always done.