Rocky start for new global board

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World economyThe Group of 20 nations, designated as the new board of directors for the global economy, is off to a rocky start.

Financial ministers and central bank governors from the 20 countries met in Washington over the past three days to advance a reform agenda designed to fix serious problems that the 2008 financial crisis exposed.

But in the end, instead of resolving differences, the discussions exposed a number of divisions not only over old issues but new problems such as rising government debt burdens.

The worry is that the debt crisis currently hitting Greece could be only the first of a series of government debt crises. The level of government debt has risen to heights not seen since just after World War II.

Of course, the finance officials sought to paper over differences, issuing a series of bland communiques pledging greater efforts at cooperation.

They insisted that they would intensify efforts to resolve disagreements on financial rules before a meeting of G-20 leaders in Canada June 25-27.

But that will require considerable effort given stark differences in such areas as setting new capital standards for banks and imposing new bank taxes to pay for the cost of bailouts.

It is highly unlikely that all of those disputes will be resolved in time for President Barack Obama and the other G-20 leaders to agree on a completed package at their Canada summit.

For one thing, many governments are facing the same challenges as the Obama administration in trying to overcome determined opposition from big banks to tightening the current rules under which they are making a lot of money.

Those activities, which have been blamed for bringing on the crisis, include trading in complex financial products such as derivatives and operating with inadequate amounts of capital to cushion against losses.

While an IMF staff paper endorsed imposing new taxes on banks, an idea that has support in the administration and in Europe, other G-20 countries — Canada, Australia and Japan — are opposed. They argue that their banks didn’t suffer massive failures and therefore shouldn’t have to bear the burden of new taxes.

IMF Managing Director Dominick Strauss-Kahn tried to put the best face on the disagreements in the financial area, saying it wasn’t important for countries to adopt the same approach as long as whatever rules changes they adopted were compatible with other countries.

The concern is that in an era of financial globalization — where millions of dollars can flow around the world at the click of a computer key — countries need to pursue similar approaches to regulation.

If they don’t, it could spark a race to the bottom where financial firms go searching for nations with weaker rules that allow them to pursue riskier activities and rake in greater profits.

“I think the charges lodged against Goldman Sachs in the United States have helped countries see the need for reforms, but they are still far apart on the best approach,” said Sung Won Sohn, a business professor at the Martin Smith School of Business at California State University.

Even in areas where the G-20 was able to agree on a more coordinated approach, there is concern that the efforts will fall short of what is needed to keep the global economy on an even keel.

G-20 officials endorsed providing emergency loans through the IMF to debt-ridden Greece.

But the size of the overall package being discussed — about $40 billion from European countries and $13.4 billion from the IMF — was viewed by many analysts as falling well short of what will eventually be required not only for Greece but other nations sinking under rising debt burdens.

“What the financial crisis and Great Recession did was pile on a lot of debt and it will take some time for nations to work through their budget problems,” said Mark Zandi, chief economist at Moody’s Economy.com.

All of the disagreements among the G-20 nations may have some people pining for the old days when the board of directors for the global economy was much smaller.

For three decades, the global economic agenda was set by the G-7, composed of the United States, Japan, Germany, France, Britain, Italy and Canada, the seven biggest economies in the mid-1970s when this group was formed.

But with China now the third largest economy in the world and economic powerhouses Brazil, India and South Korea also key members of the G-20, the old G-7 days are certainly gone forever.

No matter how messy, the world needs to get accustomed to a bigger board room.

Source: The Associated Press.