Thursday, April 2, 2009

G20 seals $1.1 trillion deal, markets rally

World leaders clinched a $1.1 trillion deal on Thursday to combat the worst economic crisis since the Great Depression, and tightened the rules to stop it happening again.
U.S. President Barack Obama played down differences at the summit and declared it a "turning point" for the world economy. French President Nicolas Sarkozy celebrated the waning of the Anglo-Saxon model linked by many to the excess that triggered the crisis.
Stocks rallied but economists cautioned against euphoria.
"We have agreed on a series of unprecedented steps to restore growth and prevent a crisis like this from happening again," Obama told a news conference. "We've also rejected the protectionism that could deepen this crisis."
At the G20 summit, the leaders agreed to publish a blacklist of tax havens that could lead to sanctions -- something France and Germany had pushed hard for -- and to impose oversight on large hedge funds and credit rating agencies for the first time.
"Today's agreement begins to crack down on the cowboys in financial markets that have brought global markets undone," Australian Prime Minister Kevin Rudd said.
Markets, desperate for good news when the global economy is shrinking for the first time since World War Two, reacted positively to the imposing headline numbers.
British Prime Minister Gordon Brown, the summit host, said governments had committed $5 trillion to public stimulus of the economy this year and next, before even taking into account the extra commitments from the summit in London.
He did not say how that squared with the stimulus estimate he gave just a day earlier -- of about half that amount.
Either way, the index of top European shares was up 5 percent. On Wall Street, the Dow Jones was up 3.3 percent.
Brown said the G20 leaders had committed on the day to new resources of $1.1 trillion that would be made available to help the world economy through the International Monetary Fund and other institutions.
This included $250 billion of IMF reserve units called Special Drawing Rights. In addition, the IMF would see its own resources tripled, with up to $500 billion of new funds, of which $40 billion would come from China.
Much of that is likely to go to struggling poorer countries, notably in eastern Europe.
"It is going to be a help to poorer countries that have been hit by the sharp decline in trade flows, said Sarah Hewin, senior economist at Standard Chartered in London.
The summit also agreed a trade finance package worth $250 billion over two years to support global trade flows, which have shrunk under the impact of the credit crunch -- a boost to the world's major exporters.
"That should be good for the big exporters such as China and other emerging economies including Brazil. It should please the Germans as well," said Jim Rollo, European Economics Professor at Sussex University.
But some economists noted the new IMF funds masked the lack of agreement on further fiscal stimulus at national levels, something the United States, UK and Japan wanted but France and Germany strongly resisted.
Brown conceded that there were "no quick fixes" but said the decisions would shorten the recession and save jobs.
The G20 said in a communique the measures taken would raise world output by four percent by the end of next year.
French President Nicolas Sarkozy said the results were beyond what could have been imagined and said the Anglo-Saxon model of lightly regulated markets was over.
Germany's finance minister welcomed the fact that no obligation was agreed for countries to adopt further stimulus packages. The issue had created tension in the summit build-up, with Washington favouring such packages and Paris and Berlin preferring to let earlier measures take their course.
Addressing a key demand from France and Germany, Brown said the leaders agreed "there will be an end to tax havens that do not transfer information on request. The banking secrecy of the past must come to an end."
Switzerland and a host of other financial centres under fire over bank secrecy have announced in recent weeks that they will shift towards international standards of information disclosure.
The tax haven issue had threatened to be a stumbling block to agreement, with France and Germany demanding a crackdown on jurisdictions whose bank secrecy laws they portrayed as enabling the rich to dodge taxes at a time of economic hardship.
"Since Bretton Woods, the world has been living on a financial model, the Anglo-Saxon model -- it's not my place to criticise it, it has its advantages -- clearly, today, a page has been turned," France's Sarkozy said, referring to the landmark conference that created the post-war economic order.

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