ANALYSIS:Though the IMF spring meeting kicked to touch on most things, the mood was surprisingly upbeat
THE G20 met on Friday and effectively determined the proceedings of the full IMF session the following day.
Among the multitude of items on the agenda, three were particularly contentious. These were the Greek bailout, the rebalancing of global growth, and taxing banks to recover bailout costs.
There was nothing in the G20 communique about Greece. Instead, the EU and the ECB issued a brief joint statement on Friday which merely noted the Greek request for assistance. The IMF did something similar. The matter is clearly sensitive.
European commissioner for economic and monetary affairs Ollie Rehn was a little more forthcoming when he said that work was being intensified with both consolidation measures and structural reform necessary over a number of years.
The latter is a new element and the EU, a novice in this area, seems to have missed out on this critical dimension in its recent decision on aid to Greece, which related to one year only.
Some observers in Washington were coming round to the view that the EU is just not capable of dealing with a Greek-type situation and that it would have been better if it had let the IMF take the lead role from day one. It now looks increasingly likely that the IMF will call the shots anyway; its influence is becoming evident, and the multi-annual approach now being adopted is classic IMF.
There is a growing awareness that the scale of the fiscal mountain to be climbed is vast with debt ratios in the advanced countries likely to hit 115 per cent. It will be a long time, possibly decades, before they go anywhere near the old EMU 60 per cent limit again.
Rebalancing global growth refers to the need for surplus countries such as China to stimulate domestic demand and allow their currencies appreciate, while the advanced world does the opposite as they, perforce, pare back fiscal deficits and seek to benefit from weaker currencies.
This, too, is sensitive with the US Congress recently threatening to take action against Chinese imports on dumping grounds. So everybody talked around it, for the most part not explicitly mentioning China at all.
US treasury secretary Tim Geithner refused entreaties to criticise Chinese policy. Instead, he confined himself to saying it was in their interest to resume the policy of letting the yuan drift down. He was so confident that rumours he did some kind of deal during his recent visit to China may well be true.
Surprisingly, taxing financial institutions turned out to be the most contentious item of them all, not that this reflected any great love for the banks. At the request of the G20, the IMF had produced a draft paper entitled A Fair and Substantial Contribution by the Financial Sector. It was not released but was widely leaked.
The first thing it did was to write off the notion of a Tobin tax, ie a levy on a wide range of financial transactions as proposed by the UK and France, because it would not focus on core sources of financial instability and would, most likely, be passed on to consumers. Instead, the IMF proposed two taxes, a Financial Stability Contribution (FSC) and a Financial Activities Tax (FAT).
Net of amounts recovered, the fiscal costs of support to banks and other institutions average 2.7 per cent of GDP in advanced G20 countries but this is not the full picture as debt is projected to rise by almost 40 percentage points during 2008-2015.
The FSC would be a levy on liabilities to “pay for the fiscal cost of any future government support to the sector” but there is confusion as to whether it would also deal with the costs of the crisis. It would be applied at a low rate and would build up over time to 2 to 3 per cent of GDP. It might be topped up by FAT on banks’ remuneration and profits, a kind of value-added tax on activities that would hit banks with big profits and large bonuses hardest.
The proposals immediately ran into trouble. Countries such as Canada, which did not have to bail out banks, said they would be punished for the sins of others and the proposals could lead to fresh instability if bank capital was eroded. Japan, Australia and India are also cool on the idea – and neither Switzerland nor Singapore are members of G20.
Jim Flaherty, Canada’s finance minister, who co-chaired the G20 meetings, reiterated his view that a tax would deplete bank capital and make them more vulnerable to crises. “We’re a sovereign country,” he said. “We can regulate our banks and our other financial institutions as we see fit.”
Questioned about this, he said his views were gaining support. The IMF will finalise the report for the June G20 meeting which will be held in Canberra and chaired by Canada. There is a tradition of not flying in the face of the chair at such meetings.
