Boiling Down the G-20 Summit

If one wants to boil down the G-20 statement to its bare essentials, it was an endorsement of aggressive fiscal and monetary policies by governments in response to the crisis. It also called for much more rigorous regulation of financial institutions, not just banks.

Among the most significant new areas that will be regulated were hedge funds and the credit rating agencies like Moody's Corp. (MCO - Analyst Report) and Standard & Poor's (a division of McGraw Hill MHP - Analyst Report).

These steps are long overdue. More international cooperation on regulation will reduce the scope for regulatory arbitrage.

The G-20 also directly slapped down Switzerland and other tax haven states, stating directly that the era of bank secrecy is over. There was also the usual boilerplate about how protectionism is bad and expanded free trade is good.

While true, it is worth noting that at least 17 of the 20 participants have taken at least some protectionist steps since the crisis started. It remains to be seen if the noble sentiments can withstand domestic political pressures. On a related note, they pledged to avoid competitive devaluations.

Perhaps the most significant concrete step taken was a dramatic $1 Trillion increase in the resources of the IMF and other international financial institutions. This will help some of the developing economies that have been slammed by the crisis, very though they were not the cause of it.

(We would note, that while many emerging economies have been slammed by the crisis, that is not true of all of them. Some of the largest emerging economies are still recording positive growth.  The most significant of these is China, which will probably grow about 6.5% this year, well down from the 11%+ levels it has seen in the recent past, but still very healthy compared to the rest of the world.  Two Chinese stocks we like are both in the Telecom sector, China Mobile (CHL - Analyst Report) and Chunghwa Telecom (CHT - Analyst Report).  Brazil is also in relatively good shape, a name to look at there is Sabesp (SBS - Analyst Report) which provides water and sanitation services in Sao Paulo.)

The statement expressed confidence that world economic growth would resume in 2010, and that all the countries would be able to pull back from the fiscal stimulus before they bankrupted themselves and for monetary stimulus before hyperinflation broke out. Then again this was a meeting of 20 heads of state and government. One does not get to be a head of government if one lacks self confidence.

While I did not expect much to come out of this summit, my expectations were basically met.

The size of increase in the IMF funding was perhaps the biggest surprise. It is likely that much of the funding for this will come from places like China, which will as a result have a much bigger say in how the IMF operates. The U.S. role will be correspondingly decreased, but we will most likely remain the single most influential country in how it operates.