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Last weeks long awaited G20 Summit Communique lifted the hopes of the world’s investors and leaves a lot of work to be done going forward by the Group. The language of the was vague and optimistic

The Highlights:
On Resources: The G-20 announced US$50B for low-income countries, and an additional US$100B in lending for Development Banks.

On Reform: Developing countries will have greater representation in the international financial institutions and that election to World Bank/IMF leadership will be based on merit.
On Regulation: The G-20 announced regulation of illicit tax havens.

As with all world summits, the G-20, just stated the goals and heralded the agreements of the parity countries leaving the hard specific work to be done.

The powers that be need to work to ensure that money going to developing countries is given as grants, not loans that trigger another debt crisis.

There remains much work to be done on the Green Agenda in the interests of developing countries at the UN Climate Change Conference in Copenhagen later this year.

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Last Tuesday Timothy Geithner unveiled a raft of new measures aimed at returning functionality to the besieged credit markets. Geithner outlined the picture of the latest US recovery attempt, i.e., promoting greater transparency and stricter oversight of both established and new financial stability programs, providing capital to institutions in desperate need of a cash infusion, committing up to US$1T to support consumer and business lending, addressing the housing crisis and reducing foreclosures, and stricter oversight of US taxpayer money. “The American people will be able to see where their tax dollars are going and the return on their government’s investment,” the Treasury Secretary said. “They will be able to see whether the conditions placed on banks are being met and enforced.

They will be able to see whether boards of directors are being responsible with the taxpayer dollars and how they are compensating their executives. And they will be able to see how these actions are affecting the overall flow of lending and the cost of borrowing.” This information will be made available on a new Web site: FinancialStability.gov.

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US banks now hold over US$1,000B of cash, which is an unprecedented level and more than five times the typical amount held over the past 40 years. The Big Q: Why? The Big A: Because the banks know that they are heavily exposed to bad loans/assets on their balance sheets and, therefore, they are very reluctant to commit capital to new lending. The European and US governments/central banks can expand borrowing/lending/asset guarantee programs and create asset management companies to buy the financial sector’s distressed loans/assets all they like, but these two courses of action augur serious problems, i.e. the calculation of the transfer price of the distressed loans/assets and the accompanying loss-sharing mechanism between bank owners, creditors and the government or taxpayers.

So, governments will have to inject still more huge amounts of new capital into banks, and perhaps the selective nationalization of weak or insolvent banks, and the sooner it happens, the quicker financial stability will return. An analyst at the Financial Times in London believes that the global banks require at least US$675B of new capital, of which half is probably needed yesterday. To date there is no hard evidence in either Europe or the USA that immediate, direct and decisive government action is taking place to resolve the global banking crisis and, therefore, the eventual economic outcome could still slide from a global recession, which is already largely anticipated by global stock markets, to a deflationary depression. Where are today’s Churchhills, Rosevelts and Thatchers?

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