G-20 doubles IMF's reserves, and the markets like it
Admittedly, it's thin gruel: finance ministers agreed to guidelines regarding how governments should purge or remove toxic assets that have constrained credit, and agreed to increase funding for the International Monetary Fund to $500 billion from $250 billion, Bloomberg News reported Monday. But the group did not agree to commit more funds for fiscal stimulus, something the United States delegation had sought.
Markets like support for IMF
Rather, the group said in a joint statement that they have taken decisive action to "boost demand and jobs" and would continue to take action until growth is restored, The Washington Postreported Monday, without specifying appropriate, additional stimulus amounts for each region, nation, etc. The G-20 also said another key priority concerns boosting lending, and passing new, more effective regulations for hedge funds and other financial institutions in the 'shadow banking' system.
This weekend's finance minister meeting was the prep meeting; the heads of government G-20 meeting will take place in Europe in April.
Comment: Some may tout the broad framework on hedge fund regulations, on which G-20 members reached agreement, The Postreported Monday, as the most significant achievement, but the view from here argues, absent the announcement of a major fiscal stimulus package by the E.U., U.S., or China, the commitment to double the IMF's resources to $500 billion is the biggest accomplishment. That level of backing will give the IMF the ability to intervene decisively in several national-level crises at once, should they occur; for example, in credit-damaged Hungary or Ukraine. The $500 billion total is not enough to put 10 fires at once, but it is enough to stop two or three, and that should be enough to calm the nerves of institutional investors, at least until the U.S. toxic asset plan is announced in the weeks ahead.
And indeed, stock markets around the world reacted favorably to the G-20 news, with the all three major European indexes (FTSE, DAX, CAC 40) closing higher for their Monday session, with Asia closing higher earlier in the day, and with the Dow up more than 100 points on Monday afternoon.
Market Analysis: Not bad, for a prep meeting. The meeting didn't produce that tangible, additional fiscal stimulus dollar (or euro) amount that many economists and public policy wonks had sought, but the IMF reserve resource decision represents a clear step forward regarding financial crisis resolution.
Or, to borrow a phrase from Professor Emeritus Henry Krisch, professor of Soviet and Russian Studies at the University of Connecticut, "There will be no national defaults, so long as the United States, Europe, Russia, and China agree that there won't be."
Further, U.S. and international stock and bond markets could have emphasized the G-20 finance ministers' lack of agreement on fiscal stimulus, but the markets chose to look past it. That, in and of itself, is a ray of light, as it represents a semblance of normalcy -- and market responses have hardly been 'normal' over the past year. Institutional investors are apparently saying that the fact that a country the size of Romania or Hungary or even Ukraine won't 'go out of business,' is a good thing, and that's the view from here, as well. And with progress like that, can progress on toxic asset removal from the financial system be far behind? Stay tuned.