As the leaders arrived for the G20 Summit in Cannes, France last Thursday, Nov. 3, discussions focused solely on Greece for the majority of the day. Greek president Papandreou had surprised the international community by announcing that a referendum would held so that the Greek citizens could vote on whether to accept the austerity package Greece would have to adopt in order to receive its sixth tranche of aid and the measures decided on at the Brussels Summit, Oct. 26-27, 2011.
A political move that could either backfire badly or gain the support of the people and therefore put the onus on the opposition parties to back the measures will hit a crescendo on Friday when a vote of confidence in Papandreou will be held.
A special meeting had convened the night before, where Papandreou met with French president Nicolas Sarkozy, German chancellor Angela Merkel, head of the IMF Christine Lagarde and ECB chairman Mario Draghi. At their press conference, Merkel and Sarkozy insisted that this new psychological element had thrown markets into a tailspin and they made it clear to Papandreou that the measures decided on in Brussels needed to be adhered to in order for Greece to stay in the European Union.
The referendum needed to be held as soon as possible with a date of either December 4th or 5th and that the Greek people needed to decide on whether or not Greece should stay in the EU. Germany and France were committed to seeing Greece stay but it was up to the people of Greece to decide if that was what they wanted. Keeping the euro currency would not be an option if Greece was to leave the EU.
On November 3, the leaders spent most of the day discussing the European situation but did find time to have talks on president Sarkozy’s financial transaction tax priority. As anticipated, there was not much agreement on this issue as most countries that weathered the financial crisis and didn’t need to bail out their banks were opposed to any sort of financial transaction tax.
Bill Gates presented his idea to the G20 leaders that a tax on financial transactions should be put towards development projects and the Europeans fully supported it. An insider at the later closed meeting commented that the Europeans admitted that in reality, they needed the money. Under the guise of aiding the poor, France reiterated its commitment to establishing, along with other countries, a tax on financial transactions. The U.K. has repeatedly said that it would not approve such a tax in its current form unless there was a global deal – which clearly did not happen.
Part II
The second day of the G20 Summit proved to be most important to the future of the global economy and the global capital markets. With the Greek crisis abated for the moment, talks shifted to Italy who voluntarily asked the International Monetary Fund (IMF) to assess and monitor its policy implementation quarterly. No country has previously asked for this type of monitoring which was decidedly absent from the situation in Greece. This should keep the situation in Italy under control and avert any escalation that was present in the Greek situation.
The list of "Too Big to Fail" institutions was scheduled to be released in the afternoon by the Financial Stability Board (FSB) but by the end of the day nothing had surfaced. They’d increased the number of systemically important financial institutions (SIFIs) to 29 from 27 and called for three policy measures to ensure a reduction in moral hazard, to have orderly resolution of systemic institutions when they get into trouble and never use taxpayer money again to bail out failed corporations.
The handling framework includes enhanced supervision obligations, enhanced resolution obligations (where SIFIs will need to submit recovery and resolution plans to supervisors) and capital surcharges.
There will be four tranches of surcharges. The first tranche carries a 1% minimum capital requirement above Basel III requirements and incremental increases of 0.5% per tranche until the fourth tranche which carries a 2.5% surcharge. A fifth tranche exists of 3.5% but no current SIFI qualifies as it is meant to be a disincentive to grow too large. Annual reviews will be conducted by the FSB in November.
The FSB also has a mandate for the coming year on the regulation of bonuses. It released the findings of two reviews that found that half of the jurisdictions of the G20 had not integrated all the standards into national rules. The FSB has now been tasked to create a dedicated surveillance instrument for the supervision of the implementation of these standards and its results will be made public.
Lastly, the FSB will focus on shadow banking and its increased regulation and supervision. Shadow banking looks at any financial entity that takes part in credit intermediation without being covered by the rules and supervision applicable to the regulated banking system.
The G20 has decided to start with the following recommendations for 2012: stricter rules for regulating the financial relations of banks with the shadow banking system, regulation of money market funds, regulation of securitization (harmonized approach to the risk retention rule), the regulation of loans and securities lending and additional measures to regulate other funds acting in the shadow banking system, such as hedge funds.
The second day of the Summit focused heavily on regulation and supervision of the financial industry and the global economic community as a whole. They achieved their aim of solidifying the commitments they’ve made in the past and creating a formal framework for carrying on the work that got under way last year with the Dodd-Frank Act and the review of MiFID II.
At his closing press conference, Mexican president Felipe Calderon, who takes over as chair of the G20 on December 1, 2011, outlined his priorities for the Los Cabos Summit to take place on June 18-19, 2012. They included recovering economic stability and regaining growth, international trade and reform of the international monetary system, furthering the work of the FSB, food security and corruption.
Lida Preyma is director of capital markets research at the University of Toronto’s Munk School of Global Affairs. She attended the G20 Summit and offered her services to Traders Magazine as a contributing writer.
