By Don Miller
The Group of 20 leaders yesterday (Thursday) agreed to collectively pledge more than $1 trillion in emergency aid amid a financial crisis that has plagued every corner of the world.
G-20 said the International Monetary Fund would receive $500 billion to loan to troubling economies, and another $250 billion in special drawing rights. The IMF will also sell some of its gold reserves to channel funds into the world’s poorest countries.
Other developmental banks – including the World Bank – will get at least $100 billion more to extend to capital-starved nations.
“Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalization and dealing with impaired assets, through a common framework,” the G-20 leaders said in a statement. “We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.”
That includes setting more rigorous limits on executive pay, tax sanctions, credit-rating firms, hedge fund holdings and the level of risk banks take, which the leaders also pledged to do.
The moves are seen as confirmation the leaders are serious about working together to get the global economy moving again.
“We’re going to see a united front,” John Lipsky, the IMF’s first deputy managing director, said in an interview with Bloomberg Television. The G-20 will take “decisive action.”
World Markets React Favorably
World stocks reacted to the new stimulus funding by powering higher as more signs appeared that the world economy could be recovering. MSCI's all-country world stock index, a leading benchmark for global equities, was up 2.3% for a roughly 22% gain since early March.
It was being driven higher by strong gains in Europe that followed a jump in Asia. In the U.S. the Dow Jones Industrial Average soared over the 8000 mark as U.S. investors cheered the news from the world’s 20 most prominent leaders, who together represent 85% of the world’s GDP.
"Market participants are becoming more convinced of a global recovery and that is causing risk appetite to increase," Toru Umemoto, chief FX strategist Japan at Barclays Capital PLC (ADR:BCS), told Reuters.
The G-20 leaders met as reports surfaced suggesting the downturn may be easing. U.S. housing purchases unexpectedly rose in February for the first time since October 2007, while Chinese manufacturing increased, recent reports showed. Last month, the Standard & Poor’s 500 Index pocketed its biggest gain in seven years.
However, policymakers still have to deal with a passel of bad news. The World Bank is warning of an “unemployment crisis,” as forecasts say the U.S. Labor Department will report today that joblessness is now the highest in 25 years.
“If you look at history, equity markets rally before the economy does,” Alastair Newton, a political analyst at Nomura International Inc. (ADR:NMR) and a former U.K. government official, told Bloomberg. “With the worst in unemployment to come, there’s still pressure on the leaders to act.”
Slumping payrolls may be the biggest concern facing G-20 leaders. Some are already under fire at home, as companies from French automaker Renault SA to computer-services giant International Business Machines Corp. (IBM) slash payrolls. Job losses could stifle any nascent recovery by snuffing out consumer spending.
Proposed funding for the IMF proposals will come from the biggest players on the global economic front.
Japan and the European Union pledged they will give $100 billion each, and the United States has indicated it will at least match that amount.
In addition, Canada announced it will contribute $8 billion (C$10 billion) to the IMF.
The communiqué has also opened the door to capital markets as a loan source – if needed – to shore up IMF resources.
News and Related Story Links:
Text of G20 joint statement
G-20 Leaders to Channel $1.1 Trillion in Aid, Draft Text Says
World stocks soar on recovery hopes