G-20 Meeting More Than a Photo-Op

By: Brewer Futures Group | Thu, Apr 2, 2009
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Unlike other G-(insert number) meetings this one will be more than a photo-op as policymakers face some of the worst financial problems in history. There is no time to pass on items at this meeting or save them for the next meeting because waiting in this rapidly changing global economic environment could prove to be disastrous.

It's a good thing that there are two photo-ops at these meetings, one at the start and one at the end, because the G-20 almost became the G-19 when French President Sarkozy threatened to walk out over issues regarding financial regulations. Knowing the French I am sure he wanted to blame the U.S.'s lack of financial regulation for the entire global financial crisis. I am sure that he let the other world leaders know that it was the lax supervision by the U.S. regulators that led to the tremendous losses. I'm almost positive that he even suggested that U.S. policies of allowing excessive leverage led to failures at some of the largest financial institutions - failures that spread across international borders affecting financial decision making all over the globe.

Why do I know this? Because in January 2008 French bank Societe Generale suffered a $7.14 billion loss at the hands of an unsupervised rogue trader who leveraged the bank's money. While he was making money, no one at the bank even noticed him. It wasn't until his gains turned into losses that he was caught. And what did the French do? They sold massive positions in the open market to cover the losses. This triggered a worldwide panic in the financial markets and may have been a contributing factor to a 75 basis point cut by the U.S. Federal Reserve at just about the same time. Mr. Sarkozy, do share your notes on financial regulation with the other 19 members.

Another issue that is likely to come up is the lack of coordination between central banks. Here is the breakdown. In one corner are central banks that are still cutting interest rates. In another corner are central banks which have cut interest rates and are now applying quantitative easing. In a third corner are central banks that have cut rates, applied quantitative easing and have moved on to intervention. Finally there are those central banks that are in between cutting and easing and easing and intervention. I know it sounds confusing but this is why they have to coordinate their efforts.

The European Central Bank is still in the process of cutting interest rates. On April 2 it is expected to cut 50 basis points to bring rates to 1.00%. This rate will not be as low as most other central banks, but it is getting closer.

The U.S. Federal Reserve, the Bank of Japan and the Bank of England have all cut rates to near zero and are now applying quantitative easing. Only the Bank of Japan is a candidate for intervention at this time.

The Swiss National Bank only three weeks ago hit the market with intervention. It wanted a weaker Swiss Franc and it wanted it fast. The reaction was almost immediate.

Sitting in between is the Bank of Canada that will finish slashing rates later this month and move to quantitative easing. The Reserve Bank of Australia and the Reserve Bank of New Zealand still have relatively high rates but they like the rates where they are. They don't like the pace at which interest rate cuts and financial stimulus move through the economy. These two central banks are likely candidates for intervention.

All of these factors have to be discussed by the G-20 countries so that they get on the same page. Most of all, the European Central Bank has to start playing ball with the rest of the world.

This point was brought up by Japan on Wednesday when its representative scolded Germany for its lack of spending. There is no question that the Germans like to save and hold on to their money. The German stimulus packages have been weak and the lack of concern for struggling Eastern and Central European economies have been noted in the press. This year is an election year in Germany and I think that the incumbents are afraid to spend money out of fear that they will be accused of having good money chase bad.

Furthermore, George Soros earlier in the year even questioned the very survival of the European Union if it does not coordinate efforts to help the weaker nations of the union. There is no doubt that aid to these ailing nations will be discussed at this meeting. I am sure that promises of funding will be made, but check with me in a few months to see if any money actually changes hands.

Finally, protectionism is also a major issue that will be discussed. Europe has become a hotbed of protectionism. Banks are denying credit to foreign companies doing business in their countries. Politicians are denying help to foreign companies. Companies are being encouraged to lay off foreign workers. This is protectionism at its finest. Hopefully this issue will be discussed and a solution will be found.

The topic that should not be discussed is the one regarding a one world currency. If this topic comes up there is likely to be volatility in the markets. Last week China introduced this topic and U.S. Treasury Secretary Geithner set off a sharp break in the Dollar and U.S. stock markets when he said the matter was being discussed.

This discussion is best left behind closed doors. The markets are too fragile at this time to handle a discussion about replacing the U.S. Dollar as the world's reserve currency. If there are any surprises at this meeting that rock the markets I can almost guarantee you that it will be regarding this issue.

This meeting should be more than a photo-op so expect something concrete to come out of it. I'd put my money on more coordination between central banks. Protection is very personal to the Europeans and they are unlikely to change their practices. Promises of aid to emerging markets will be just that - promises.

 


 

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