Translated material
London summit: who wins?
The G20 will try to drive the bankers into a corner and change the IMF beyond recognition
Tomorrow, the leaders of the world's leading economies, united in the G20, meeting in London, will answer whether they are ready to decide on a “global deal” in the face of the global crisis. The idea of a “global deal” was proposed in February by the host of the summit, British Prime Minister Gordon Brown. He believes that at the G20 level, club members should coordinate their anti-crisis programs. “Every part of the world should be part of stimulating the global economy, should support the economy through investment, by lowering interest rates as much as possible... The whole point of the G20 is that the world should take action to solve global problems,” explained Brown is the essence of the deal.But it looks like there will be no deal. This, in particular, is indicated by the demarche of French President Nicolas Sarkozy, described yesterday by The Times of London, who allegedly warned his ministers that he would leave the summit “if there are no results.” The result for Paris is increased regulation of financial markets. In this, Mr. Sarkozy is not alone, however. Gordon Brown said in a recent speech that stricter controls should "drive shadow bankers into a corner." An employee of one of the international banks, when asked by Vremya Novostey to comment on the calls of European leaders to tighten control over the activities of hedge funds, noted that problems were noted in sectors that are already under regulation, and jokingly added that hedge funds are demanding tighter control over the activities of European leaders...
Goldman Sachs bank analyst Rory MacFarquhar told Vremya Novostey that two decisions could make the London summit successful: a significant replenishment of IMF resources (this would create a reserve of confidence that, for example, Eastern Europe will not be left without help) and the intention implement a “global stimulus” - a package of injections into the economy on a G20 scale. Only the first of two points looks realistic. According to available data, the urgent desire of the United States to announce on behalf of the G20 the specific size of packages to stimulate economic growth (previously the figure was 2% of each country’s GDP) will not be recorded in the final communiqué: thrifty European states, primarily Germany, firmly refuse similar obligations. Loud calls to stop the policy of protectionism will no longer inspire anyone - after the first anti-crisis summit , held on November 15 in Washington, almost all of its participants broke their promise to refrain from erecting new trade barriers for a year.
In general, the experience of the Washington summit clearly demonstrates the consequences of inflated expectations. The most ambitious promises have not been fulfilled, some have simply been forgotten (such as the idea of creating international supervisory boards for global banks), and a large number of technical solutions to improve supervision in the financial sector clearly do not require regular meetings of heads of state.
However, now Gordon Brown, who headed the British Treasury for ten years in the government of Tony Blair, is closer than ever to realizing his ideas about reforming the International Monetary Fund. His completely transparent plans to reduce the already weak independence of this institution happily coincided with the desire of many to modify the IMF. Of course, at the level of declarations, everyone likes the goals of the reform. But this does not at all guarantee that everyone will like its results. “In my view, in the midst of a dramatic global financial crisis, IMF reform should not be a priority at a one-day G20 leaders' summit,” says Martin Gilman, a professor at the Higher School of Economics, who has worked at the fund for more than 20 years. -- World leaders must focus on immediate measures to overcome the crisis. And in this context, the International Monetary Fund is not part of the immediate solutions (except for helping countries already in dire straits). However, it would be useful to reaffirm at the highest level the need for comprehensive reform of the fund.” But, Mr. Gilman continues, “different players each have their own understanding of IMF reform.”
In recent years, by IMF reform, the interested public understands primarily changes in the structure of its capital - the so-called reform of quotas and votes. It must change the balance of power in this organization that developed in the second half of the last century, in which the United States and the European Union have a controlling stake. The rise of the Asian “tigers” and the rapidly growing contribution of China and India to global GDP had virtually no impact on the distribution of shareholder quotas. Today, China has the sixth largest quota (3.72%), ahead of all the G7 countries only Italy and Canada. The size of the Indian quota (1.91%) is much lower than that of Russia, Saudi Arabia, and the Netherlands.
When Brazil and India loudly called for an overhaul of their outdated system in 2006, the IMF and its leading shareholders realized that reform could no longer be delayed. Months of discussions ensued over how to change the formula for calculating quotas. The United States and Russia, which took an identical position, said that calculations should be made on the basis of a simple indicator - GDP at purchasing power parity. But this decision, quite natural from an economic point of view, turned out to be politically unacceptable: it would greatly reduce the “share block” of the European Union, which exceeds 30%. No one in Europe was ready to give up three years ago, and no one is ready to give up now. Last year, the reform was approved: the formula for calculating quotas was stuffed with various indicators in order to level out the ratio of the size of national GDP, and special allowances were approved for several developing countries. The system thus remained the same, prompting disappointed comments from American and Russian officials and harsh criticism from independent economists. An extraordinary review of quotas, which, apparently, in accordance with the decision of the G20 finance ministers, will be carried out in 2010, will not change the situation, since it will be carried out on the basis of the current formula.
Meanwhile, as Rory MacFarquhar rightly noted, the IMF needs to replenish its resources. Perhaps the funds that are planned to be raised (we are talking about an additional 250-500 billion dollars) will not be entirely used for lending, but will serve as a guarantee for investors that distressed economies will not be abandoned to their fate. Countries that have financial resources (such as China or Russia) link the provision of money to the fund with its reform. In this regard, Martin Gilman notes that Europeans may agree with the American position on the need to increase the resources of the IMF, but it is unlikely that at the current stage Barack Obama will push the topic of revising the quota system in favor of developing countries: “It can hardly be assumed that in his first European "Obama will want to upset traditional allies during his trip."
However, it would be a mistake to reduce IMF reform to reform of the quota system. After all, the crisis not only aggravated the problem of the legitimacy of this organization, but also showed the need to reform its activities, goals and methods of its work.
It is noteworthy that, albeit belatedly, the IMF itself realized this. Recently, the fund's board of directors approved proposals from its management regarding changes to the lending system. It is worth highlighting two decisions: firstly, the conditions for supervision with the implementation of economic programs agreed upon with the fund were sharply reduced, and secondly, a new instrument called the Flexible Credit Line was introduced.
The difference between the new instrument is that a line of credit is provided to countries that request it as insurance or emergency financing, but at the same time meet a certain set of predetermined criteria .
“This is not the first attempt by the fund to create a financial instrument based on the pre-qualification of the borrower, according to which the IMF does not set conditions in the field of economic policy, but proceeds from the implementation of strong policies in the previous period,” says IMF Executive Director for Russia Alexey Mozhin. However, he notes that past attempts were not very successful and were practically not in demand.
Martin Gilman recalls that after the crises of 1997-1998, a similar instrument (Contingent Credit Lines) was already introduced in Asia and Russia. The IMF's official website says that the fund introduced it as a measure to strengthen the protection of countries from the financial crisis, but "for various reasons the instrument was never used." "Perhaps it will happen this time, but for different 'various reasons,'" Mr. Gilman says.
The main problem with the FCL and similar tools is how to interpret compliance with prequalification requirements. “If you raise the bar too high, it turns out that all those countries that meet the requirements do not need loans. And those who are in need do not meet these requirements. If you lower the bar, you run the risk of massive distribution of money to countries pursuing weak policies. This already carries serious financial risks for the fund,” explains Mr. Mozhin.
At the same time, the Russian director expresses the hope that past experience has been taken into account and the new tool will still be in demand. In particular, this time the IMF made the credit line longer (the instrument is designed for six months with the possibility of extension for another six months). The “insurance” nature, when a country can take money at any time (if, for example, capital outflow begins), also seems relevant in the context of a global crisis.
Easing the criteria applies to all other fund programs - those that provide for monitoring of implementation. Considering the difficulties the fund’s clients sometimes face when receiving the next loan tranche, this measure looks revolutionary. Although its real meaning will become clear, apparently, only in practice.
“In fact, this measure is aimed at making it easier for countries to decide to turn to the fund for help. It’s no secret that in many countries there is an idea that such an appeal is a direct path to the fact that the fund will establish a “diktat” in economic policy,” Alexey Mozhin explains the changes in the IMF lending system. He says that the solution found was a compromise between those who considered it necessary to maintain full control over the implementation of economic programs, and those who demanded a complete abolition of lending conditions. As a result, criteria in the field of structural policy (such as the introduction or abolition of a specific tax, introduction into parliament, or even the adoption of some specific laws) will now be written into the programs as general goals, and will not be obstacles to the allocation of the next loan tranche. At the same time, all macroeconomic criteria - the budget, reserves and other indicators of monetary policy - remain the subject of quarterly supervision.
The heads of state and government of the G20 are unlikely to discuss such specific topics at tomorrow's meeting - most likely, they will limit themselves to mentioning this in the final communiqué. But another important reform - the reform of IMF management - Gordon Brown will certainly try to approve at the highest level. It is no coincidence that a week before the summit, the IMF published a report by a “group of wise men” led by South African Finance Minister Trevor Manuel. The group, which includes former IMF head Michel Camdessus, former US Treasury Secretary Robert Rubin, current head of the Chinese Central Bank Zhao Xiaochuan and others, was created last year by the fund's managing director Dominique Strauss-Kahn to develop a new management concept for the IMF.
Among the many correct words and good ideas, including the recognition of problems with the legitimacy of the fund in its current form, the idea of abolishing the permanent IMF board of directors in Washington, long lobbied by Gordon Brown, clearly stands out. The “wise men” propose to activate the Council at the level of ministers laid down 60 years ago in the founding documents of the fund, which should, having political weight and responsibility, formulate the development strategy of the organization (it is proposed to include the issue of appointing the head of the IMF among its powers). The Ministerial Council, according to the plan of the “wise men,” should meet at least twice a year - just like the International Monetary and Financial Committee, which now operates at the ministerial level.
But the current board of executive directors (it consists, as is known, of 24 people representing the interests of one or a group of countries - in total, members of the board of directors represent all 185 countries that are members of the fund) are proposed to be freed from daily work and routine decision-making and “elevate” its functions to the formulation of “strategic” recommendations to the ministerial council.
Martin Gilman notes that Manuel's group's proposals represent a repackaging of many disparate ideas that the fund's shareholders never had the political will to implement. The real problem, says Mr Gilman, is the lack of political clout among chief executives - but the ministerial council will suffer the same fate once the crisis abates.
Thus, the bottom line of Manuel’s group’s proposals is to reduce the operational powers of the fund’s board of executive directors, the body that now serves as the only effective mechanism for monitoring the fund’s activities on the part of its shareholders. The recommendations of the “wise men” are, at the very least, controversial and need to be discussed. But everything is going to the point that there will be no discussion: according to Vremya Novostei sources, approval of the report is already listed in the G20 summit communiqué. And since few heads of state understand the mechanics of the IMF (unlike Gordon Brown), it is unlikely that anyone will try to block the “go-ahead” for reform of the fund’s management. Lulled by beautiful words into the need for just such a reform, the summit participants will simply hand over the IMF to the operational management of those structures that even now have an informal decisive influence on it - the US and UK ministries of finance. It is possible that this will be the most important outcome of the second G20 summit.