Unity is vital on banking's toxic assets, economists warn G20

Unless the Group of 20 leading and emerging countries agree on common principles to sort out toxic assets in the banking system, they stand little chance of stopping the accelerating decline in the global economy, according to prominent economists.

• In a report presented to G20 officials preparing a summit in April, the economists warn that “neither monetary nor fiscal policies will work unless and until the blockages in the supply of credit are resolved”.
• This week marks one of the most important points in the manoeuvring before the summit as senior officials from all the countries meet in London to try to draft an agreed text on boosting economic growth and reforming financial regulation.
• Many countries, including the US, the UK and Switzerland, have announced their own rescues and insurance schemes for impaired bank assets with little regard for contradictions or conflicts with the policies of other countries.
• When Alistair Darling, the UK chancellor and G20 host, announced the UK asset protection scheme for the Royal Bank of Scotland on Thursday, he also sent a letter to other G20 finance ministers calling for “shared principles for dealing with asset protection and insurance”.
• He called for the principles to include maintaining stability, encouraging lending, and restoring strength to the banking sector, while protecting public finances and rejecting financial protectionism. France, for one, has declared itself surprised and chastised Britain on its lack of consultation with others.
• If a co-operative agreement on dealing with impaired banking assets can be achieved, the report calls on those in charge of monetary and fiscal policy to act decisively to boost demand.
• Professor Richard Portes of the London Business School, one of the academic report’s authors, said: “The right response will differ among countries but surplus countries – particularly those with current account surpluses – ought to be the ones expanding the most.”
• He urged countries to move interest rates close to zero quickly and embark on various forms of quantitative easing – the creation of money to ease credit flows by buying up assets – something that is under way in the US and Japan, is about to start in the UK, but is still avoided by continental European countries.
• The best way of getting surplus countries to agree to act domestically to boost demand, Prof Portes said, was if the International Monetary Fund had sufficient funds to ensure that it could guarantee to bail out deficit countries that became embroiled in the global crisis and prevent further contagion.
• Finally, the report calls for ministers to insist on a central clearing counterparty for credit default swap trades “without further delay”.
• Prof Portes said that persistent delays in its implementation were adding to the vulnerabilities in the global financial system.