Banks in Australia and other countries will not have to worry about the push from the US and Europe for a global levy or tax, but they will have to hold more capital and liquidity to withstand a future credit crunch.
And finance ministers from the world’s 20 leading economies have ended their support for fiscal stimulus at the weekend meeting in South Korea, a recognition that confidence over deficits, spending and sovereign debt were now the dominant issue for the markets to contend with.
That’s also the message the flight into the uS dollar is telling us and why US bond yields are remaining low.
In dropping their proposal for the levy, the Group of 20 finance ministers and central bank governors in Busan, South Korea, gave countries the freedom to do what they thought best for their domestic circumstances.
The result allows nations such as Australia, Canada, China and Brazil, whose banks suffered less during the global financial crisis, to avoid a levy, which had been vigorously pushed by Europe and the US.
But some countries, such as the UK, France and Germany seem determined to press ahead with some sort of tax or levy which will be used (ha) to finance the next crop of failures in some sort of bailout fund.
But the UK wants to fund general recurrent revenue from the tax, while Germany and others in Europe want to use it for a special support fund.
The UK controls two of its biggest banks, which means that it is its own bailout fund. The tax could generate enough money to offset some of the interest costs on the bonds issued to support the two banks.
But the G-20 separately said that “it is critical that our banking regulators develop capital and liquidity rules tough enough to ensure lenders can withstand further crises. As we agreed, these rules will be phased in as financial conditions improve and economic recovery is assured, with the aim of implementation by end-2012."
Here in Australia the banks, like their offshore counterparts, are arguing against higher capital holdings, but regulators will get their way.
The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because of the concerns investors now had about the stability of public finances in some countries.
“The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué said, referring to the eurozone crisis that is continuing.
“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.
It’s the right fiscal policy, not fiscal stimulus, that is now the order of the day.
Europe is the concern on spending, and is also the concern on its continuing weak growth outlook for the eurozone and the continent as a whole.
Even though the G20 Finance Ministers said the world economy was recovering faster than expected, Europe lags both in terms of growth and deficits and debt (as does the UK and the US).
These concerns about Europe’s weak growth outlook were raised by Tim Geithner, US Treasury secretary, who argued in a letter to the G20.
Mr Geithner said, “Concerns about growth as Europe makes needed policy adjustments threaten to undercut the momentum of the recovery,” he wrote, adding that fiscal tightening won’t “succeed unless we are able to strengthen confidence in the global recovery”.
