G20 Hopes for a Cure

Five things we learned from this weekend’s G20 meeting of finance ministers and central bankers.

1. A desire for better. The communiqué candidly acknowledges growing threats to the global economy, and signals a desire for stronger growth at a time when “downside risks and vulnerabilities have risen.” There also was recognition that monetary policy has carried most of the load in recent years, and going forward more responsibility rests on governments to accelerate long-promised fiscal and structural reforms.

2. Other people’s money. The problem with a full-throated call for growth is that there is no evidence that any major country leaves the meeting with different policies than they entered the weekend with. The U.S. government would like to see more demand, but Congress is unlikely to go along with new spending proposals. German finance minister Schauble threw cold water on the idea of new debt financed spending ahead of the meeting, and Japan remains committed (for now) to future fiscal consolidation. Only China seems focused on fiscal expansion, though its unclear the extent to which the boost to demand from the budget goes beyond allowing the automatic adjustment of spending to the slowdown. One area of coordination was on infrastructure, where the G20 again called for more spending by the World Bank and other international financial institutions, but the amounts involved are likely to be small.

3. China gets the benefit of the doubt. One question prior to the meeting was whether there would be an effort, led by the United States, to press the Chinese for stronger and more explicit commitments to support demand and avoid further depreciation. While Chinese officials did embrace these objectives and reportedly made strong statements in the meeting that they did not intend further devaluation, the communiqué largely avoided the type of specific commitments markets were hoping for. With China continuing to lose $100 billion in reserves each month, some will see this as opening the door for further depreciation against the dollar.

4. The Plaza is still just a hotel. Prior to the meeting, there were a surprising number of analysts talking about the prospect of an agreement on currencies similar to the Plaza Accord of 1985. Such ideas were always fantastical. The G20 called for countries to refrain from cheapening their currencies to gain a competitive edge. They reaffirmed their policy that exchange rates should be market determined, and that governments should adopt policies aimed at domestic macro balance and not intervene in foreign instruments. This formulation has been in place since the yen weakened in the spring of 2013 following the introduction of Abenomics. There was a mild hint at future possible action in their commitment to consult closely on exchange markets and their reminder that markets can get it wrong, but no binding commitments.
5. A possible new sovereign debt initiative. Among the issues for further action (buried at number 12) is to explore “market-based ways to speed up” the strengthening of existing sovereign debt contracts. Recall that last year, in the wake of Argentina litigation and concerns about holdouts in the Greek debt restructuring, the G20 endorsed the inclusion of new clauses in debt contracts that would make it easier to get broad participation in debt deals. That was a significant step, but there was always a question about what to do with the nearly $1 trillion in existing bonds that didn’t have the new clauses. In a paper I did with Greg Makoff, we argued that the G20 should take the lead in encouraging market-based transactions to swap old debt for new debt, and it now seems the G20 is open to going in this direction. This could be a meaningful step toward a better functioning debt market (but it wouldn’t help Venezuela).

In sum, the communiqué is about as much as can be expected in the current environment—a commitment to stay the course, combined with a recognition of the risks and a promise to do more if needed. Tomorrow, we will see if markets take confidence from such commitments, or were hoping for something a bit bolder.