Emily Vogl, Frank Vogl
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IIF Proposes Fresh Drive to Strengthen Global Policy Coordination
Urgent Fiscal and Monetary Decisions, Along with Financial Regulatory Rebalancing, Needed to Restore Market Confidence
Washington D.C., September 14, 2011 — The Institute of international Finance, today called on the finance ministers and central bank governors of major economies to demonstrate urgency in creating a simpler, more transparent framework for economic policy formulation and implementation. This is essential to put in place a globally consistent set of fiscal, monetary, exchange rate and financial regulatory policies to secure stability and economic recovery.
The IIF said that new rules of the game need to be devised so that even the largest economies, including the United States and China, operate within an agreed framework of discipline, accountability and a globally coherent set of objectives.
IIF Managing Director Charles Dallara stressed that next week’s meetings in Washington DC of the global financial policymakers, ahead of the G-20 Summit in November, “Provide not only a sorely needed occasion to re-establish a sense of global responsibility taking precedence over autarkic nationally-driven policies – but an important window of opportunity to avoid another global recession. Resolute leadership can restore market confidence.”
The IIF, the leading global association of financial services firms with over 440 member institutions headquartered in over 70 countries, today sent a policy letter to the finance ministers and central bank governors who will be attending the IMF-World Bank Annual Meetings.
Mr. Dallara said that it is difficult to see how economic growth can be revitalized under current policy approaches. He noted that major financial regulatory reforms were essential after the economic crisis and the IIF supports them, but some of the measures are now constraining credit growth to key sectors of the economy at a time of severe economic weakness. Aggregate lending to households and businesses in the U.S., Euro Area and the U.K. is down 0.5% from year-ago levels – this is well below levels seen in comparable periods in past economic cycles. “The balance of risks has clearly shifted: continued private-sector deleveraging in some countries and sectors would be counterproductive. We therefore encourage policymakers to now undertake a rebalancing of the regulatory reform program,” he said.
Mr. Dallara added that it is important to maintain the timetable for raising the basic capital requirements of Basel III, but that the recently proposed “surcharges” for global banks were misguided as policy and seriously flawed methodologically. He noted at a press conference that because of the impact of uncertainty in the market, the short-term liquidity ratio should be revised as a matter of priority to make it workable, through a process of dialogue with the industry. As the problems with the long-term liquidity ratio are much less tractable, it should be shelved. “Some of the regulatory measures that have been introduced in recent months, or which are now under discussion, run counter to the critical objective of economic recovery today. We urge policymakers to consider ways to reduce pressure for financial sector deleveraging and encourage appropriate risk-taking by financial firms.”
The IIF noted that fragmentation of the financial system has increased in the last year and this trend needs to be reversed. In the current challenging environment it is important that the authorities make sustained efforts to ensure globally consistent regulation and supervision, especially as they implement new capital and liquidity rules. It also stressed the importance of G20 leadership in carrying international proposals for cross-border resolution of failing firms into national regulations to assure international consistency and cooperation.
New Global Coordination Approaches
The IIF letter stated that G-20 macro-economic policy coordination would be greatly facilitated by bringing together the leaders of a small group of the world’s major economies, with the technical support of the IMF and the OECD, to develop recommendations for key policy actions to be submitted for consideration and endorsement to the broader G-20.
Mr. Dallara said that, “Within the framework of this new top level policy coordination there should be agreement on straightforward quantifiable benchmarks, such as levels of fiscal deficits, public debt, external balances, major structural reform initiatives and exchange rate policies compatible with achieving globally consistent objectives. High-level international coordination of fiscal policy efforts would produce a markedly better outcome for the global economy as a whole – not only by advancing the goals of debt reduction and stronger, better balanced growth, but also by helping to restore confidence in the policymakers who are working towards them.”
The IIF said that with global economic prospects deteriorating, a synchronized drive for fiscal austerity could be very damaging. Countries should proceed with fiscal consolidation at a pace designed to preserve as much aggregate global growth as possible. In practice, this means that highly indebted countries under market pressure will need to redouble efforts (including vital structural reforms) to reduce debt to sustainable levels. Those with most leeway – including some major surplus countries in both mature and emerging markets – should be encouraged to use available fiscal space for measures to support domestic growth. Countries in the middle should articulate a serious and credible plan for medium-term fiscal reform – having such a plan firmly in place could create some leeway to provide near-term fiscal support for economic growth. Across the board, difficult structural issues such as entitlement spending, tax expenditures, and the income tax structure should be tackled.
Mr. Dallara stressed the crucial need for progress by Euro Area governments on fiscal policy coordination and discipline. He said the strengths of the EA, “Are being masked and undermined by the parochialism and nationalism being exhibited in some instances, by the lack of determination of national leaders in certain cases to tackle fiscal problems with conviction, and by the lack of Euro Area institutional infrastructure to facilitate coherent and timely decision-making in an integrated fashion. A reinforced framework of fiscal discipline is essential, and interesting ideas towards this end have recently been advanced by Euro Area leaders. But with this first step taken it is vital that leaders act upon the necessity of further progress towards fiscal integration if the European project is to be fulfilled and their common destiny realized.”
He added on Euro Area fiscal policy coordination that, “Swift and decisive action could do much to gain crucial market support, and could also catalyze international support from countries outside the Euro Area – both for the reform efforts of Greece and for other troubled Euro Area countries. Recent indications of a willingness to consider such support are welcome, and demonstrate a growing global awareness of the importance of re-establishing stability and growth in Europe for the world economy.”
Emily Vogl, Frank Vogl