Finance chiefs pledge to restore confidence

Bloomberg

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Finance chiefs from the biggest developed and emerging economies pledged a "sustained effort" to end the global recession and to cleanse banks of toxic assets.

"We were seized by the fact that there was a sense of urgency," U.K. Chancellor of the Exchequer Alistair Darling told reporters after the Group of 20 finance ministers and central bankers met in southern England on Saturday. U.S. counterpart Timothy Geithner said there was a "clear commitment to do what’s necessary, to keep at it, to get the economy on track."

Such promises marked a compromise at the end of a week in which U.S. calls for governments to spend more were rebuffed by euro-region ministers. The International Monetary Fund predicts the first global contraction in six decades and on Saturday won a commitment to have its resources at least doubled to help it better fight the spreading turmoil.

"Our key priority now is to address the value of assets held on banks’ balance sheets, which are constraining banks’ lending" and damaging economies, the G-20 statement said. Banks are still hoarding cash after being stung by more than $1.2 trillion of writedowns and losses. Interbank lending rates last week rebounded to the highest level since Jan. 8.

Setting new principles

The G-20 set a dozen principles to be followed as members take on impaired assets in an attempt to avoid an uneven approach that may distort capital flows and spark protectionism.

Among them: shareholders should be exposed by the "maximum possible" to losses or risks prior to a government intervening. There should also be flexibility when judging which assets can receive support, and it should be clear how they are valued.

Companies that receive help should be run "according to business principles" and agree to provide borrowers with credit and impose conditions on executive pay. Authorities should give only temporary assistance and explain how they will end it.

The G-20 members also said they would strengthen ties between their individual banking supervisors. Credit rating companies, hedge funds, off-balance sheet vehicles and credit derivatives markets will be subjected to greater oversight.

"Support for the economy will serve for nothing if the financial system is not fixed," French central bank Governor Christian Noyer told reporters Saturday.

The ministers met to craft an agenda for their leaders, who meet in London on April 2, as they struggle to get to grips with the tainted assets lying at the heart of the crisis.

Citigroup, Commerzbank and Lloyds Banking Group have lost more than three fifths of their value this year and the Standard and Poor’s 500 Financials Index has dropped 35 percent.

Data showed the outlook for recovery is darkening with Chinese exports plunging by a record, German factory orders sliding 38 percent in January and U.S. consumer confidence near a 28-year low.

Reassuring China

U.S. President Barack Obama said in Washington Saturday investors can have "absolute confidence" in U.S. investments after China said it’s "worried" about its Treasury holdings.

G-20 central banks also committed to maintaining expansionary monetary policies for "as long as needed" after cutting interest rates to records and will use all the tools they can.

Geithner approached the G-20 meeting by lobbying his opposite numbers to follow the U.S. in injecting fiscal stimulus equivalent to at least 2 percent of their economy’s gross domestic product this year. European officials argued they had already spent enough, had bigger social safety nets and didn’t want to blow out budgets.

Papering over those differences, the G-20 said the IMF will monitor budget policies and judge if more action is needed. The officials pledged to coordinate efforts and to maintain fiscal discipline and price stability in the long-run.

"Yes to stimulus packages, but without losing sight of feasibility," Italian Finance Minister Giulio Tremonti told reporters. France’s Christine Lagarde said her concerns about a split before the meeting were overdone and that officials had instead "agreed that the relaunch has to go ahead on four wheels."

Some Europeans nevertheless reiterated their concern that policy makers risk overdoing their response. Germany’s Peer Steinbrueck said "it makes no sense to pump more and more money into our economy" when financial markets are still brittle.

"We’re desperately looking for a solution in which those who haven’t caused the problems are spared," said Steinbrueck. France and Germany agreed it’s "important to talk about an exit strategy" when the global economy recovers, he said.

Resources for IMF

The IMF was told its firepower will be bolstered to at least $500 billion after it was inundated with loan requests. Smaller countries will be given more say on how the fund is run by early 2011 and its next boss will be selected in an "open" process and won’t automatically be a European, the G-20 said.

In a bid to address some of those concerns and avoid future crises, G-20 officials said they were working to subject the financial system to more curbs and ensure regulations "dampen rather than amplify economic cycles." Options include introducing buffers that encourage banks to save capital in good times.

G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., Britain and the European Union.