UK NATIONAL INCOME & OUTPUT (GDP)

(source: Simon Ward at Henderson New Star)
UK GDP data exaggerates recession depth. GDP data is subject to major revisions for up to 30 months. UK revisions tend to be upward. A comparison with the last 3 cycle recessions suggest UK official estimate of a recent fall in GDP of 5.7% between Q1 2008 & Q2 2009 will be revised to show a much smaller decline. This view is supported by indicators, such as labour market stats, which, though worsening, is doing so less than expected per official GDP fall.
Bank of England has a "real-time" database of national accounts statistics that, for some series, including GDP, goes back to 1976. Based on recessions in 1974-75, 1979-81 and 1990-91, real GDP (after netting for consumer inflation) fell from peak to trough by 4.6%, 6.5% and 4.3% respectively. In the latest vintage of statistics, the falls are 2.7%, 6.0% and 2.5%. So revisions have cut the GDP drop by 1.9%, 0.5%, & 1.7%. The smallest of the 3 adjustments (1979-81) may be misleading because it coincides with major change to profile of the recession. The originally-estimated 6.5% GDP decline referred to the change between Q2 1979 and 3Q 1981 but recession trough subsequently shifted to Q1 of 1981. The latest statistics show a 4.6% GDP decline over the original recession period. A 6-month shift in start or end of recession estimate is not unusual e.g. the current US recession whose end was announced by Ben benranke today. It was originally thought to have started mid-2008 and then backdated to Winter 2007. UK recession was backdated too to having started in mid 2008 and is expected to end at end this year or early next year.
Paat comparisons indicate, however, that the current estimate of a 5.7% UK GDP decline by the second quarter of 2009 could eventually be revised down by as much as 1.9 percentage points. A simple model for GDP growth based on changes in vacancies and claimant-count unemployment suggests that, and at keast that a substantial downward adjustment is warranted. Tracking GDP rises and falls in the last three cycles suggests an annual decline of 3.7% in the first quarter of 2009 versus a current official estimate of 4.9%.

Toxic debt boon - UK

By Ian Fraser
Published: The Sunday Times
Date: May 10th, 2009
THE UK government should be able to claw back at least of half its forecast budget deficits in 2010-12because of higher-than-expected returns from its ownership of shares in troubled banks and profits from bank bailouts, according to an Edinburgh-based economist.
Robert McDowell, a banking economist and risk-management consultant, said: “The UK and US Treasuries are charging substantial fees and exerting 25-30% haircuts, leaving themselves with more than adequate headroom to generate substantial medium-term profit which, I calculate, will finance both their bank recapitalisations and pay off half of medium term government budget deficits, thus relieving taxpayers of the risk of sharply higher future tax rates.”
The British and American treasuries have been widely slammed for their programmes to purchase or swap billions of pounds of “toxic waste” or “legacy assets” from the banks – including impaired mortgage-backed securities, collateralised debt obligations, credit card bonds and student loans.
However McDowell, who advises banks and sometimes governments and is a contributor to the high-profile www.asymptotix.eu financial risk management blogging site, indicated such criticisms are unjustified.
He believes that, while asset-backed securities (such as RMBS and CMBS) were arguably the cause of the credit crunch, they are also going to play a major part in bringing it to an end.
McDowell has worked out that the government various support schemes for the banking sector – including the special liquidity scheme and the asset protection scheme – will generate a net profit for the UK government of about £185bn, and very possibly more than £200bn, “which is a substantial three-year gain from off-budget financing worth about £900bn currently.”
He said the benefit may all be used as part of the Bank of England’s £150bn quantitative easing scheme authorization for buying in government bonds. This would be the same as paying off a major part of government fiscal borrowing, said McDowell.
He said that if the government is able to book his higher expected profit of £200bn, then it would be able to eradicate some 45% of future budget deficits, on the assumption that these will limb to £175bn in 2009 before falling to £160bn in 2010 and £125bn in 2011.
McDowell added: “Given that long-term interbank funding that UK banks require to finance their funding gaps remains so hard to obtain from private sector sources, we can expect the Bank of England to add several £100bn more to the asset protection scheme during the remainder of this year, which means we can be confident there will be a £200bn three-year gain or more - sufficient to cover half of government budget deficits.”
In his recent budget report Chancellor Alistair Darling said: “Reflecting the principle of transparency, the fiscal forecasts include a provisional estimate for the high end of a range for the net impact of unrealised losses on financial sector interventions, equal to 3½ per cent of GDP.”
The Treasury has forecast the UK’s budget deficit will be 12.4% of GDP in 2009/10, 11.9% in 2010/11 and 9.1% in 2011/12. McDowell said the Chancellor was signaling that about half of the forecast deficit is required to compensate the economy for the banks’ plight and will not need to be spent if the government’s financial sector interventions pay off.
“I know it is hard for taxpayers to understand that their money is not what the government is playing with in its liquidity windows and treasury bills for bank asset swaps,” said McDowell.
“They readily confuse government budget deficits with bank bailouts. The two things are not the same. Government budget deficits are almost entirely fiscal responses merely to recover economic growth, not to recapitalise or restructure the banks directly.”
He said the spate of government bond issuance in recent weeks has been entirely sensible. “There is too much absurd doom-mongering in financial markets,” he added.
An version of this article was published in The Sunday Times under the headline “Toxic debt boon” on May 10th, 2009.

CREDIT RATINGS AGENCIES BET ON GLOOM

McCreevey, the EU DG for Competition is pushing through a law to force the major credit ratings agencies, Moody's, S&P, and Fitch to publish and validate their models and ratings systems. If they want t stay in business they must become more transparant and ensure that the disastrous kinds of absolute failures that Moody's had to confess to in its securitisation ratings models (announcement 16 June 2007) are never repeated. The ratings agencies are under threat from governments and are critically in the gunsights of the G20 agenda. They are also going to be arraigned in class action suits. Their commercial survival is threatened. This fundamental problem going forward is not holding them back from rattling the cages of the markets with threatened downgrades and dire warnings. The latest is corporate bond defaults. I find Moody's forecasts just absurd and irresponsible. The banks are in the firing line along with the corporations if corporate bond defaults rise to the percentages forecast. It is in the power of banks directly, and governments indirectly via fiscal reflation, and sometimes directly e.g. GM, plus shareholding investors and institutional investors especially have yhet to be tapped by non-bank corporations for significant help. Therefore, corporate defaults are something that can be managed, mitigated, assuaged, and we are supposedly in the US and UK within 2-4 quarters of return to positive GDP growth. Therefore, what is the basis of Moody's estimates. It seems they have simple trend line forecasts and are not taking account of risk mitigation factors.
Moody's is rightly being heavily blamed for bug-ridden ratings models applied to securitisation issues that were indifferent to rising defaults.
But insofar as Moody's, S&P and Fitch feel the heat of major blame for the crisis, essentially for applying 'through-the-cycle ratings generally and not advising enough on actual short term risks, and like many forecasters who missed the turning points, they are now erring on the other side by being excessively gloomy, and as ever assessing risks gross oblivious to collateral and risk mitigation actions available to all inolved. As a risk rater, predicting more gloom has an obvious gain of believing that it is harder to be blamed for being doom-laden than for being euphoric, for bearish rather than bullish opinions. The assumption is that everyone currently will be much more forgiving of an overly pessimistic forecast than an overly optimistic one, so best be biased towards 'Roubini' scenarios. Of all the lawsuits in the pipeline against the Ratings Agencies, none are lawsuits for over-estimating defaults. If they keep on like this I for one can forsee precisely such lawsuits. They are not impossible to define.
As per optimistic forecasts, there are few benefits to accuracy; when has a risk manager earned bonus for predicting shock events won't happen that subsequently don't? Coming up with improbabilities (Nassim Taleb's 'Black Swans' building on Plato's white swans and John Stuart Mill's use of black swans as examples of inductive reasoning, or my own alterntive South American Swan theory, of swans that are only black from the neck up!) is above almost everyone's 'pay-grade' even that of CEOs and their Boards. Governments never publicly predict recessions. Everyone fears that gloomy forecasts risk becoming self-fulfilling. Yet, these are precisely the risks that the ratings agencies are now running as a knee-jerk reacion to all the criticism they have received; they are biting back with vengence!
The default rate for speculative grade corporate loans was 4.1% in 2008, which is 71st out of the 89 years of data on this series, below 2001, 1990, and 1970 peaks. The prediction (above) for a 16% default rate in 2010 is a record spike in defaults, higher than any year, including 15.4% in 1933. If Armageddon turns up, you can't blame Moody's for not warning us.
Moody's forecasting model is dubious and simplistic, based on few factors and context-free factors at that, too few observations and embarrassingly incomplete macro-economic models. The data is highly serially correlated, implying the number of observations vastly overstates the range of outcomes, typical monte-carlo.
They operated a new model in 2007 called the Credit Transition Model. This uses recent credit grade transitions, an unemployment forecast, plus yield spreads (currently high, especially when many famous brands are offering 50% higher coupon than bank rate plus LIBOR). Credit risk grade 'buckets' are broad and it takes a lot to transition to lower grades, but this has been eased and there is a wholesale trends of downgrade transitions, and so projecting those forward easily generates an increase in default rates. But, major corporations are split by sector are not highly granular buckets. Therefore it is actually not straightforward to translate PD rates and stress LGDs to produce actual value of defaults. The unemployment rate is going up, but how that correlates with defaults is non-trivial to model and forecast. There are likely to be some finger in the air assumptions here, especially when not part of a complete macro-economic model. Do High Yield spreads correlate with future default rates? If so then we would simply place corporate borrowers into risk grade PD buckets depending on their bond yields and forget eveything else?
Moody's predicted rising corporate defaults in 1998 that did not arrive. In 1990 and 2000, they did not predict the increases in defaults, they merely changed credit ratings as default rates arrived. To the extent default rates are serially correlated, the high yield spreads did not add much information, nothing much to be relied upon. Better would be to go back to basics and Du Pont Ratios.
A bond trading well below par is in trouble, but the hypothesis that aggregate high yield spreads predicts future default rates as based on historical data, is very doubtful. Nonetheless, the new model shows an eerily accurate forecast over the past 15 years (according to the Moody's Credit Transition Model 2007 document there was a successful backtesting: Beware a time series model designed to make forecasts that inevitably has to incorporate past trends and yet be a necessary simplification, hence the back-test is merely the model's slightly simplified way of representing the recent past, not evidence of an ability to forecast the past as it might forecast the future. Moody's Annual Default report 1999 published in January 2000, there was a prediction of future defaults falling in speculative grades to "between 6.0% and 4.5%", but "trending downward over the year", also with "increasing recovery rates". They also noted the US moving away from the 'Asian Crisis' of 1998, and so were oblivious to the next bubble burst and stock market crisis leading into recession. Recessions happen suddenly and aggregating economic forecasts always result in compromise smoothing of the data, on top of which is the problem that GDP data gets revised in hindsight severely for up to 2 years after the data is first published. The fact is that users of Moody's and the other ratings agencies models expect a superior insight based on very detailed annual reports analysis etc. commiserate with what they imagine to be the rigorous analysis of corporate credit ratings based on some models of Du Pont ratios. Instead what we have is a simple-minded model that any analysts could construct in a spreadsheet from readily available information, and very little of that!
So, like those AAA-rated circa 2003-mid-2007 Mortgaged Backed Securities, Moody's is giving the market exactly what it agrees with and wants right now, subjectively, not objectively, more of the same lack of intellectual courage and lack of academic rigour. It is hard to vouch for whether S&P and Fitch deserve to be tarred by the same brush. But, so far that seems a reasonable working assumption?
As Eric Falkenstein says in his seeking Alpha article from which I took much by way of inspiration for the above, "part of being a professional credit executive is knowing the difference between what you can predict and what you can't. Moody's should simply stop forecasting aggregate default rates. They don't add any value here and merely highlight that for anything many people already have an opinion on, Moody's is not a special lens, but rather a mirror." That I broadly agree with from an investor viewpoint. From a concern about banks' balance sheets, aggregate defaults are certyainly worth analysing and modeling and fporecasting, but clearly they require a lot of sectoral disaggregation and to be part of a fully worked out macro-economic model, which Moody's is clearly not resourced for!

G20 COMMUNIQUE

Banks need to take note that they are all citizens' banks and this is the premise why if they have the right to offer public services i.e. banking licenses, in truth they all belong to governments and in a crisis that ownership can be readily exercised totally. Therefore, all banks needs to read and understand the G20 Communique fully. The total Communique is only 9 pages plus 8 pages of annexes.
The main statement states the following:
1. We, the Leaders of the Group of Twenty, met in London on 2 April 2009.
2. We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men, and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution.
3. We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today’s population, but of future generations too. We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.
4. We have today therefore pledged to do whatever is necessary to:
restore confidence, growth, and jobs;
- repair the financial system to restore lending;
- strengthen financial regulation to rebuild trust;
- fund and reform our international financial institutions to overcome this crisis and prevent future ones;
- promote global trade and investment and reject protectionism, to underpin prosperity; and
- build an inclusive, green, and sustainable recovery. By acting together to fulfil these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future.
5. The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.
Restoring growth and jobs
6. We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth.
7. Our central banks have also taken exceptional action. Interest rates have been cut aggressively in most countries, and our central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability.
8. Our actions to restore growth cannot be effective until we restore domestic lending and international capital flows. We have provided significant and comprehensive support to our banking systems to provide liquidity, recapitalise financial institutions, and address decisively the problem of impaired assets. We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions, implementing our policies in line with the agreed G20 framework for restoring lending and repairing the financial sector.
9. Taken together, these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times. Acting together strengthens the impact and the exceptional policy actions announced so far must be implemented without delay. Today, we have further agreed over $1 trillion of additional resources for the world economy through our international financial institutions and trade finance.
10. Last month the IMF estimated that world growth in real terms would resume and rise to over 2 percent by the end of 2010. We are confident that the actions we have agreed today, and our unshakeable commitment to work together to restore growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to trend growth. We commit today to taking whatever action is necessary to secure that outcome, and we call on the IMF to assess regularly the actions taken and the global actions required.
11. We are resolved to ensure long-term fiscal sustainability and price stability and will put in place credible exit strategies from the measures that need to be taken now to support the financial sector and restore global demand. We are convinced that by implementing our agreed policies we will limit the longer-term costs to our economies, thereby reducing the scale of the fiscal consolidation necessary over the longer term.
12. We will conduct all our economic policies cooperatively and responsibly with regard to the impact on other countries and will refrain from competitive devaluation of our currencies and promote a stable and well-functioning international monetary system. We will support, now and in the future, to candid, even-handed, and independent IMF surveillance of our economies and financial sectors, of the impact of our policies on others, and of risks facing the global economy.
Strengthening financial supervision and regulation
13. Major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens.
14. We each agree to ensure our domestic regulatory systems are strong. But we also agree to establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires. Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.15. To this end we are implementing the Action Plan agreed at our last meeting, as set out in the attached progress report. We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:
- to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
- that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
- to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;
- to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;
- to endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;
- to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;
- to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;
- to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and
- to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.
16. We instruct our Finance Ministers to complete the implementation of these decisions in line with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a report to the next meeting of our Finance Ministers in Scotland in November.
Strengthening our global financial institutions
17. Emerging markets and developing countries, which have been the engine of recent world growth, are also now facing challenges which are adding to the current downturn in the global economy. It is imperative for global confidence and economic recovery that capital continues to flow to them. This will require a substantial strengthening of the international financial institutions, particularly the IMF. We have therefore agreed today to make available an additional $850 billion of resources through the global financial institutions to support growth in emerging market and developing countries by helping to finance counter-cyclical spending, bank recapitalisation, infrastructure, trade finance, balance of payments support, debt rollover, and social support. To this end:
- we have agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into an expanded and more flexible New Arrangements to Borrow, increased by up to $500 billion, and to consider market borrowing if necessary; and
- we support a substantial increase in lending of at least $100 billion by the Multilateral Development Banks (MDBs), including to low income countries, and ensure that all MDBs, including have the appropriate capital.
18. It is essential that these resources can be used effectively and flexibly to support growth. We welcome in this respect the progress made by the IMF with its new Flexible Credit Line (FCL) and its reformed lending and conditionality framework which will enable the IMF to ensure that its facilities address effectively the underlying causes of countries’ balance of payments financing needs, particularly the withdrawal of external capital flows to the banking and corporate sectors. We support Mexico’s decision to seek an FCL arrangement. 19. We have agreed to support a general SDR allocation which will inject $250 billion into the world economy and increase global liquidity, and urgent ratification of the Fourth Amendment.
20. In order for our financial institutions to help manage the crisis and prevent future crises we must strengthen their longer term relevance, effectiveness and legitimacy. So alongside the significant increase in resources agreed today we are determined to reform and modernise the international financial institutions to ensure they can assist members and shareholders effectively in the new challenges they face. We will reform their mandates, scope and governance to reflect changes in the world economy and the new challenges of globalisation, and that emerging and developing economies, including the poorest, must have greater voice and representation. This must be accompanied by action to increase the credibility and accountability of the institutions through better strategic oversight and decision making. To this end:
- we commit to implementing the package of IMF quota and voice reforms agreed in April 2008 and call on the IMF to complete the next review of quotas by January 2011;
- we agree that, alongside this, consideration should be given to greater involvement of the Fund’s Governors in providing strategic direction to the IMF and increasing its accountability;
- we commit to implementing the World Bank reforms agreed in October 2008. We look forward to further recommendations, at the next meetings, on voice and representation reforms on an accelerated timescale, to be agreed by the 2010 Spring Meetings;
- we agree that the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process; and
- building on the current reviews of the IMF and World Bank we asked the Chairman, working with the G20 Finance Ministers, to consult widely in an inclusive process and report back to the next meeting with proposals for further reforms to improve the responsiveness and adaptability of the IFIs.
21. In addition to reforming our international financial institutions for the new challenges of globalisation we agreed on the desirability of a new global consensus on the key values and principles that will promote sustainable economic activity. We support discussion on such a charter for sustainable economic activity with a view to further discussion at our next meeting. We take note of the work started in other fora in this regard and look forward to further discussion of this charter for sustainable economic activity.
Resisting protectionism and promoting global trade and investment
22. World trade growth has underpinned rising prosperity for half a century. But it is now falling for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras. To this end:
- we reaffirm the commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports. In addition we will rectify promptly any such measures. We extend this pledge to the end of 2010;
- we will minimise any negative impact on trade and investment of our domestic policy actions including fiscal policy and action in support of the financial sector. We will not retreat into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries;
- we will notify promptly the WTO of any such measures and we call on the WTO, together with other international bodies, within their respective mandates, to monitor and report publicly on our adherence to these undertakings on a quarterly basis;
- we will take, at the same time, whatever steps we can to promote and facilitate trade and investment; and
- we will ensure availability of at least $250 billion over the next two years to support trade finance through our export credit and investment agencies and through the MDBs. We also ask our regulators to make use of available flexibility in capital requirements for trade finance.
23. We remain committed to reaching an ambitious and balanced conclusion to the Doha Development Round, which is urgently needed. This could boost the global economy by at least $150 billion per annum. To achieve this we are committed to building on the progress already made, including with regard to modalities.
24. We will give renewed focus and political attention to this critical issue in the coming period and will use our continuing work and all international meetings that are relevant to drive progress.
Ensuring a fair and sustainable recovery for all
25. We are determined not only to restore growth but to lay the foundation for a fair and sustainable world economy. We recognise that the current crisis has a disproportionate impact on the vulnerable in the poorest countries and recognise our collective responsibility to mitigate the social impact of the crisis to minimise long-lasting damage to global potential. To this end:
- we reaffirm our historic commitment to meeting the Millennium Development Goals and to achieving our respective ODA pledges, including commitments on Aid for Trade, debt relief, and the Gleneagles commitments, especially to sub-Saharan Africa;
the actions and decisions we have taken today will provide $50 billion to support social protection, boost trade and safeguard development in low income countries, as part of the significant increase in crisis support for these and other developing countries and emerging markets;
- we are making available resources for social protection for the poorest countries, including through investing in long-term food security and through voluntary bilateral contributions to the World Bank’s Vulnerability Framework, including the Infrastructure Crisis Facility, and the Rapid Social Response Fund;
- we have committed, consistent with the new income model, that additional resources from agreed sales of IMF gold will be used, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years. We call on the IMF to come forward with concrete proposals at the Spring Meetings;
- we have agreed to review the flexibility of the Debt Sustainability Framework and call on the IMF and World Bank to report to the IMFC and Development Committee at the Annual Meetings; and
- we call on the UN, working with other global institutions, to establish an effective mechanism to monitor the impact of the crisis on the poorest and most vulnerable.
26. We recognise the human dimension to the crisis. We commit to support those affected by the crisis by creating employment opportunities and through income support measures. We will build a fair and family-friendly labour market for both women and men. We therefore welcome the reports of the London Jobs Conference and the Rome Social Summit and the key principles they proposed. We will support employment by stimulating growth, investing in education and training, and through active labour market policies, focusing on the most vulnerable. We call upon the ILO, working with other relevant organisations, to assess the actions taken and those required for the future.
27. We agreed to make the best possible use of investment funded by fiscal stimulus programmes towards the goal of building a resilient, sustainable, and green recovery. We will make the transition towards clean, innovative, resource efficient, low carbon technologies and infrastructure. We encourage the MDBs to contribute fully to the achievement of this objective. We will identify and work together on further measures to build sustainable economies.
28. We reaffirm our commitment to address the threat of irreversible climate change, based on the principle of common but differentiated responsibilities, and to reach agreement at the UN Climate Change conference in Copenhagen in December 2009.
Delivering our commitments
29. We have committed ourselves to work together with urgency and determination to translate these words into action. We agreed to meet again before the end of this year to review progress on our commitments.

To download go to:
http://www.londonsummit.gov.uk/resources/en/PDF/final-communique
Annexes:
http://www.londonsummit.gov.uk/resources/en/PDF/annex-ifi
http://www.londonsummit.gov.uk/resources/en/PDF/annex-strengthening-fin-sysm
The annexes add 2 + 6 pages to the main communique of 9 pages. The whole statement is commitment to do things expressed as principles. There is a lot of room for interpretation.

GLOBAL MEANS EVERYONE: CHINA TOO

I have just returned from a week in South Africa training bank executives and discussing with them the way in which the credit crunch and global downturn is spreading. I said Africa is only the GDP size of Belgium, 1% of world GDP. South Africa with over four times the population of Belgium is only half the GDP of Belgium. For some listeners such comparisons are quite contrary to their subjective assumptions about what is real in the world. At another end of some similar perspective is China. Its economy is larger than Italy's but only just about the size of France, but onl;y if you accept the official figures with minor adjustments for error.
Political geography and fiscal and monetary degrees of freedom that any one country can muster is no protection ultimately from the worst of the crisis. I said i expect even China may fall into recession this year, and if it can so can anyone. China was also a bubble economy even if it is the surplus trading counterpart to the US bubble. Trading surplus is not a bellweather measure of fundamental economic growth. That said, the US, UK and other credit-boom deficit countries have clearly produced a major filip for trading partners like China and this has been good on balance for poorer developing countries. But, just because they were trade suplus-earning dfoes not means they are better placed to survive or ride-out the global crisis! China also needs a stimulis package, proportionately one much bigger than the USA. It has at least the foreign currency reserves to leverage this. Other countries do not and they need external assistance. The GDP growth of China is very impressive even if it reflects considerable and crude PR artifice in national income accounting whereby the growth rates have really been about one third less than advertised and inflation accounting is circumspect. This year and last year are the first since records began when the aggregate of the world's economic growth is negative. In countries where growth is currently positive it is not tenable to make plans on the presumption that this dissonence is sustainable. No place can remain positively disconnected. There has been a delusionary presumption that some countries are too insignificant to register on the radar of the world's markets, that the richer the country the worse matters are going to get, while poor countries may just cruise along and by the time the shocl-wave reaches them the rest of the world will alreday be well underway in fixing the problems.
According to the World Bank: "What began six months ago as a massive de-leveraging in financial markets has turned into one of the sharpest global economic downturns in recent history." That is a mild and optimistic statement. Hans Timmer, manager of World Bank Global Prospects adds, "Even with a return to positive growth, the problems that are being created at the moment because of the sharp fall [in growth] will remain with us in 2010 and 2011." Also, relatively optimistic in my opinion, though it is meant as a warning to countries maintaining some false confidence.
OECD, representing the world's richest nations, has a gloomy forecast that predicts global trade will shrink by more than 13% in 2009. That is obviously an under-estimate in volume terms given that petroleum trade, which is half of world trade has fallen by more in $ price and not the only commodities to do so compared to last year. The dramatic volatility in investment flows and interbank lending combined with major falls in demand by major importing, trade deficit countries will so disrupt the pattern of world trade that the uncertainties produced must have at least a 15% negative growth effect. If world trade, which is mainly denominated in $ dollars, falls by 13%, it is possible to envisage the volume of world trade falling by 20% after taking account of a 30% rise in the $ exchange rate. However, it works out the disruption to the pattern of trade will be traumatic round the world.
Klaus Schmidt-Hebbel, OECD Chief Economist said, "We are in the midst of the steepest, most synchronized recession in our lifetime, certainly since the 1930s." It will reach even to Chongqing, the world's biggest city by population, 33 millions, deep in the inland heart of China with an economy roughly that of Manchester, England. The Chinese started out sometime not long ago with only 20% of the poulation in cities and towns ('urbanised'). Present trends suggest 70& urbanised by 2040 roughly. This urbanisation has been the single biggest factor in China's growth, pulling 200 million into the cities and eventually nearly twice this. It means that many people brought into urban economy where every transaction, every action, has to be mediated by money. Continuing alonmg this trend means building as much metropolitan townscape again as currently exists. That is not physically possible from an infrastructure and services perspective. Nor is it in political-financial systems terms possible. For these reasons alone China cannot maintain its recent growth trajectory. Ans, in fact, it is now taking steps to try and stop the inward migrations. There are even signs of return migrations; the shock of big city delights is not pleasing to everyone. China has an advantage compared to most developing countries by having a large number of major urban centres (USA has a world-beating number of 80), but it lacks the balancing between all these of a sufficiently developed and complementary range that it can internally generate the domestically redistributive growth that development economists and now G20 are talking of globally. The credit crunch and global recession will variously hit China and its centres and regions much as the wave is rippling through the wider world. Like the World Bank, OECD also expects economic contraction to be worst for the wealthiest parts of the world (w.g. OECD countries which means three-quarters of the world economy by value if only a fifth by population), falling by over 4% (= a loss of two weeks of annual income and spending). That, they say, would be the "deepest and most widespread recession in 50 years,." UK is expected to shrink 3.7%, U.S. by 4%, Germany 5.3%, and Japan by 6.6%. The latter two are especially export-dependent for their GDP numbers, but so too is China. China may well experience recession in 2009, but will we know that; will the Chinese government permit the official figures to show that? It is bad enough that US official figures show the following: But jobless figures and trade protection may be the least of the issues that can cause sufficient stress and strain to lead to warfare. Robert Zoelick, President of the World Bank, is so worried that he thinks we could see an upsurge in warring and violence on the streets. "These events could next become a human and a social crisis, with political implications. People in developing countries have much less cushion: no savings, no insurance, no unemployment benefits, and often no food. There is a greater risk in doing too little than in doing too much. No one can be certain whether these packages offer enough stimulus for a long enough time."
That is one reason for the G20 pledge of an additional $1.1 trillion of stimulus money from the 20% of people enjoying 80% of world income to the 80% of the world's population not enjoying only 20% of world income. What some extremely prudential commentators argue against this is that you can't borrow-and-spend your way to prosperity. These commentators (and their political representatives who cut the G20 package from $2 trillions to $1.1 trillion) think such sound-bites are pearls of wisdom, but clearly are no students of economic history, which points entirely the other way. I could go further and say there is no such thing as 'spending' without 'borrowing'. Spending only out of income is thought by some to be the route to growth by transferring income from less productive activety into investment into more productive activety and forgets that excess income is mostly saved or spend on acquiring assets, not on reinvestment into new production. This is why we have banks who take assets as collateral alongside savings and convert these into investment spending loans. If you decide credit and borrowing is not the way to go, then you risk other means that people will resort to for equality of opportunity. The extent to which everyone relies on banks one way or another is surely a measure of the extent that we all have to borrow to grow. The opposite theory presumes that only those who generate excess savings have the right (not necessarily the duty) to be the only ones to invest in new growth.
One US investment curmudgeon said to me, "Heck, all it took was massive government spending to cure a comatose economy, Russia would be ruling the world today... you and I know better than that?" Er, um, no. The USA may be a quarter of the world economy, but it strikes me that they don't seem to know that money comes in many flavours, in different currencies. The same pundit tells me that, "If yall wanna invest in countries with a positive balance of trade, don't spend more than they make, and think yall can still have growing economies." Trade supluses do not a world economy make, not least because any currency earnings cannot be spent just anywhere as if they are all domestic value money. The US economy may be shrinking by anything up to about 6% this year while according to the World Bank, China will grow by 6.5% in 2009. This does not mean shedding U.S. assets and loading up on Asian stocks. The US $ exchange rate has risen fast even as the economy is touching bottom. China is shrinking and that alone plus likely devaluations may in $ dollar terms make an investment shift from US to say China lose money. The reverse may also become true. The problem is that the currency denomination of gains and losses is unpredictable when currencies are realigning by larger margins than GDP growth rates. China's economy is about one seventh that of the USA by value and that may include some exaggeration on the Chinese data side. It is inconceivale that China, whose GDP estimate for 2009 was 9.6% in September 2008 and 6.5% today, will not be 3% shortly and possibly zero or negative by year end. It shares the same world as other countries and has good reason for proposing one of the biggest fiscal stimulis packages on the planet. My US pundit forgets to notice that the Chinese stock market index grew 400% from 2005 to 2008 having doubled from mid-2006, but that this coincided with massive growth in domestic day-trader speculation and a relaxation of bank reserve requirements plus lower interest rates, which then all had to go rapidly into reverse to try and get excess liquidity out of the market i.e. this was also a credit-bubble boom, and consequently the long run growth rates and other charting assumptions are unreliable. It is a point worth making again, share prices are moved by frequency of direction of buy sell orders more than by volume or value. It is a confidence and belief matter more than one of fundamental value theories. It is part of the anxiety of US investors that they can be enticed into believing foreign markets are somehow more real than there own. The professionals know better.

G20 D&G AND TRANSATLANTIC ZIG-ZAG

Finance ministers are gathering in Sussex today to prepare the ground for the G20 meeting in 3 weeks time. The meeting will be a defining moment of the financial crisis, the moment for agreement on global coordination to do 'whatever it takes' to speed up recovery and avoid 'Recessio' leading to 'Depression'. In the US and UK, as D&G both appreciate, there is a successfully-developing, closely-mirrored, three-pronged approach, asset-swap funding, capitalisation, and insurance guarantees. All three are mostly self-funding and therefore off-budget (of government tax and spend budgets). It may, in hindsight, appear to be turning out, and will turn out, more an example of 'soft-choices' than 'hard-choices'! "Who knew it would be so easy?"- I hear commentators sneer. Such sarcasm would be mistaken. The UK and US financial-crisis counter-measures have broken the mould of past responses. These solutions were not inevitable choices, even if they turn out to have probably been the best choices or only ones capable of working. Martin Wolf, of the FT, whose opinions are picked over round the globe, has written that G20 will fail because not enough will be done. Success requires that more than enough is done! This feigned shock-surprise can extend to apoplexy on the question of fair value accounting. Jamie Dimon, JPMC CEO, who is close to Bernanke and Geithner, says yes we all support fair value mark-to-market accounting (fiercely insisted upon by the IASB) but not to be applied where it has never applied and is inappropriate e.g. loans-accounting and inventory, by which he means in the 'banking book'. That seem intuitively ok, except that there are useful techniques of credit risk and market risk assessment by also pricing assets according to credit default spreads and collateralised debt prices. Yes, I know these are not entirely reflective of the underlying assets and have their own pricing dynamics internal to these derivative instruments. Fine, but thes references prices and spreads do provide a conservative reference price that can be triangulated against other valuations such as hold-to-maturity, over-the-cycle, cash-flow NPV and so on. Part of the compensation for foreign investors in illiquid US bonds has been the rise in the $ exchange rate. If the US fiscal stimulus kicks in early the US trade deficit will widen again and the $ will fall and oil very likely rise slightly. To avoid this the US is therefore pressing other countries to fiscally expand their economies at the same time. The US has reassured China that its $1.5tn of foreign reserves vested in US bonds is safe. Does that mean guaranteed and insured against dollar writedown losses or in Chinese Renimbi.Either way pressure will be on to change the accounting rules. The last thing the American public will stand for is a US large comnpensation payment to China. The analysts laptops hit the floor on this, in reaction to Fed Chairman Ben Bernanke's comments at the Council on Foreign Relations on Tuesday this week. During that speech, Bernanke weighed in on diluting "mark to market" accounting, by saying: "The ongoing move by those who set accounting standards toward requirements for improved disclosure and greater transparency is a positive development that deserves full support. However, determining appropriate valuation methods for illiquid or idiosyncratic assets can be very difficult, to put it mildly. Similarly, there is considerable uncertainty regarding the appropriate levels of loan loss reserves over the cycle. As a result, further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their pro-cyclical effects without compromising the goals of disclosure and transparency. Indeed, work is underway on these issues through the Financial Stability Forum, and the results of that work may prove useful for U.S. policymakers." By this he also means the G20 Agenda for the London Conference. The first point, one that no-one else may say, though you can read it in many of my blogs here - governments (treasuries and central banks now as direct and indirect owners of $trillions of banking assets, as insurers and guarantors against credit risk losses, and as holders of banking assets, held as collateral against massive issuance of treasury bills and central bank cheques and as liabilities, deposits, to support capitalisation of banks' equity capital) have an extremely keen interest in avoiding having their financial balancing embarrassed by asset write-downs based only on defaults (unrealised losses) or credit default spreads and their impact on market prices. Ben Bernanke suggests "modifying" accounting rules might help the banking system. This we have heard before, but every time resisted by the IASB's Mr Tweedie, and indeed also resisted by many frontline financial market professionals (who may or may not also be short-sellers). Bernanke does not say it would help the Federal Reserve, US Treasury, FDIC, Bank of England, HM Treasury, ECB and many others. But, the strict legal fact is that majority or wholly-owned government assets and banks are technically outside regulatory supervision and strict financial accounting standards such as IAS and IFRS, though they have their own government accounting standards and are sensitive to any fear of cooking the books because what we do not want is loss of confidence in government finances - the credibility of which are already stretched toi breaking point among taxpayers. Therefore, have no fear, the government accounting will be accurate and clear, just not quarterly! What Bernanke did is shift towards the banking industry's apologists, as promoted by teams of highly-paid lobbyists, assorted policymaker advisers, and insider-pundits (including Steve Forbes, who wrote an Op-Ed in the WSJ) arguing that once you cut to the chase — the problem with the banks isn't all the junk-bond and illiquid securities and subprime loans and naive hubris. It's not that banks maxed-out to balloon their books for short-term bonus rewards, or by taking on excessive risk beyond what capital reserves could support, lending against banking assets and property collateral whose value was plunging or about to fall off the cliff, no. It is not that they failed to do economic analysis, chased fees as arrangers and underwriters without real-world risk assessments, or over-leveraged on 2% downpayments or on derivatives paper profits, or mis-sold junk to pension funds and foreignors, or were blind-sided by the ratings agencies, no. It's not that they funded cosy relationships with hedge funds, property developers, M&A and private equity deals, foolish commercial offices and shopping centres, pricing on unrealistic future cash-flows, unsecured consumer credit, and unaffordable mortgages for poor people, or chased market-share quantity instead of quality, also no. It was all those things and more. But, the defence is that wht was happening was ok when prices were real, normal, going places, not today's shockingly artificial, panic-driven, bank-run, sold-short, below-book-value prices. Today is not real. It is temporary and recovery will prove this and that is why recovery needs to come sooner than later. And they ask themselves without getting any cogent answers "how can asset prices diverge so far from cash-flow values?" What of course they will not accept is that reality is a long run trend, as most chartists know. But, of course we never travel directly along that trend only either side of it, zig-zagging. We zigged up for years further than anyone had a right to think was sustainable and we are now zagging badly.
Some financiers/investment bankers don't care. Why should they if they've retired with plenty of loot, including even maybe MADOFF's earliest Ponzi clients? Legal suits may catch up with many including a few hundred inside-traders and senior ex-managements. But, their defence includes saying that regulators and economists didn't tell them what was up ahead and over the hill? Pull-eaze, sure we did, but you didn't want to listen and didn't want to know and didn't understand anyway, banking and economics qualifications not being a professional requirement for the right to trade and investment $ billions. But knowing the regulations was a requirement that in law could not be dodged by delegating to others, so they were delegated, and to middle-managers and junior analysts with no real power or status, not being bonus-earners. Canada has a story to tell here. Canadian banks have survived the credit crunch well largely by shifting their loans from households to industry ahead of time. Bankers complain they have to mark their book of securities made up of bundled loans to current market prices, but these are 'bad' prices. Fair value by definition is the price obtained between illing buyer and willing seller, not that obtained by 'forced sales' in on-way markets. But, by the same token, they should not have been profitably priced by issuers based on one-way sellrs' markets either. Bankers say, but yes, ok, at least there was a market, but now it's not just that prices are today "artificially" low — but, when it comes to interbank credit and private buyers of securitised banking assets there is NO market, only the government as 'buyer of last resort' and for many smaller banks, any not of systemic importance, not even that, and for NBFIs (Non-Bank Financial Institutions, the 'shadow-banks' no lender of last resort). So, what's the solution? Well, only we could avoid marking those assets to market, or use new super-NPV cash -low MODELS — which, show "real" value of those securities is higher — then the banking system would be fine and we can all go back to life as 'normal'. let's re-book it all into the banking book, or into 'bad-bank' work-out off the balance sheet, or, which might be quite good, go back to through-the-cycle values at least for everything that is not sub-investment grade or sub-prime and just treat asset values as separate to cash-flow p/l and risk assess this over the expected credit and economic cycles. Sounds good, except bamnkers don't have models and systems and historical data to do that, and not even central banks and ratings agencies have that in place either? We need to cook the books differently and make sure the result is edible. Like crisp and golden eggcup buns in standard shapes and sizes. The ingredients all exist but they need gathering together and someone has to write a new recipe and publish the cookbook. Sad fact for now is that banks and the authorities do not have the systems and forecast-accounting needed, the kitchen facilities, utensils and the cooks, to implement alternative yet real-world solutions. So they are stuck with trying to cross-correlate various partial systems, adopt wide margins of error, and hope the results can be tracked into the right ballpark to sell in the stands and resume the game, but even that take brainpower and computing power on the field that is in very short supply. [Please excuse the cake-mixing with sporting metaphors.] Houston, there's a problem ... pretending something's worth more than the market will pay doesn't change capitalist reality! hence, governments step in to buy time and get well rewarded for doing so too! The problem isn't that there's NO market for these securities, after all they mostly contain all our loans and we're not all busted or jobless. The problem isn't that the prices are "artificially" low either. The problem isn't how we account for these assets. The problem is that the industry doesn't want to acknowledge that today's prices are the REAL prices or acknowledge that capitalism means losses not just profits, falls not just rises. Of course, profit and loss is a value that depends on the time over which it is measured, daily, weekly, monthly, quarterly, annually or 3, 5, 10, 20 years. There is no question that the world of finance shifted from slow-home-cooking to fast-food-eating-out. The markets contain speculators and investors who have risk exposures and repayment obligations that is as diverse as all the timespans over which gains and losses may be accounted for. Shifting fair value to the long end, 'into the long grass' does not save those at the short end. They know that and have been exerting their own solutions, short-selling. But, short-sellers have had a magnificent bull-run inverse of everyone else's bear-run, and are satiated. So maybe now is the time to shift the goal-posts.
There are bidders out there for discounted bonds... at the RIGHT strike-price. Vulture funds, hedge funds, private equity investors: They've all raised many $ billions to scoop up cheap real estate, inexpensive bundles of mortgage backed securities, and distressed buyout loans. But, they perhaps have waited, bluffing too long, and now government has stepped in, called 'all-in' bigger than any private sector players imagined could be possible, and scooped the pot. But, the loser, the sellers, don't want to admit that reality. They balked at the buyer's bids. They're hanging on, hoping against hope that they won't have to go to where the market is. And the governments are figuring out ways to keep the other players in the game and so is happy to receive their IOUs. Policymakers are afraid of mass insolvencies. So Bernanke is returning to something akin to the early 1980s use of Regulatory Accounting Principles (RAP), which papered over insolvencies in the Savings & Loan industry. Papering over problems didn't mean they went away, only that they were amortised over longer periods of time. The unofficial nickname for RAP used to be Creative Regulatory Accounting Principles. Banks are not so lamed as S&Ls or are they? When all Japanese banks went insolvent in the early 1990s and all other SE Asian and Chinese banks in the late 1990s, they were allowed to work-out and government paid down loan loss provisions and now they are all back in rude good health. The S&Ls that were granted forbearance to grow their way out of insolvency. They increasingly gambled on new ventures, especially commercial real estate, to do so. Result: they eventually blew up anyway. That is not affordable by the economy in the case of big and medium-sized (if systemically important) banks.
The strategy of slow-cooking, time-delay, to stall on hope has another more recent analog: what we saw in the early days of the housing market downturn. Sales volume dried up, while the supply of homes for sale surged. The Anglo-Saxon approach of unlimited, 'whatever it takes', lender-of-last-resort response. The summit of the G20 leading advanced and emerging countries in London on April 2 2009 will fail. Its members are refusing to meet what Lawrence Summers, senior economic adviser to the US president Barack Obama, calls “the universal demand agenda”. In the US, the get mad spirit of Andrew Mellon, Treasury secretary to Herbert Hoover, remains alive for many, the opposite of JM Keynes revived again for both US and UK governments. His advice – lamented Hoover – was: “liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate”. Yet this foolish view is not animating US policy. The danger is not of doing nothing, but rather of doing too little. If such timidity fails, opponents will argue: these policies have failed. This will exacerbate confusion, making attempts at decisive action later on more difficult and ineffective. A major part of stimulus packages has to be alternative energy programmes. Energy, oil depletion, global warming, credit crunch, recession-depression, unemployment, various unstable regions where cross-border wars and civil wars are possible, nuclear arms race, many things appear recipes for disasters looking ahead. There are many voices saying this could be the 1930s again heading for the 1940s and it is time for the peace-securing EU to prove those credentials, and so on. Oil is half of world-trade by value even at the lower end of its price range. What happens if there there are absolute shortages. The right thing to do is to do more than enough. It will always be possible to withdraw stimulus a year or two hence. It will be far more difficult to make action effective if depression, both economic and social, takes hold. European countries appear to be resisting Treasury Secretary Tim Geithner's fresh calls to unleash more stimulus money and free up a half-trillion dollars to lend to struggling countries. This will lead to some tense discussion as Darling and Geithner (the Dolce & Grabbana of world recovery) and their finance officials lobby the ministers and officials from the other Group of 20 nations tonight and tomorrow. As the U.S. calls for more spending, more Eastern European countries also are coming to the table hat in hand, looking for financial help from the IMF, but does the rest of the world have the political spirit and global outlook to give? The FT reported, "We're just getting into the worst of the crisis in a global sense," said Ralph Bryant, a senior fellow at the Brookings Institution who specializes in international economic issues. "Many developing countries ... are just beginning to feel the really bad effects." But EU leaders recently rejected a request from Hungary for $241 billion in bailout money for the region, but the EBRD gave €24bn which supplied much of the current year's funding gap needs of the banks. 80% of Eastern Central Europe's banking is part of western banks and therefore their cross-border funding needs are mostly internal to banks that should be able to finance the obligations. "I think they're on a different page," Bryant said of U.S. and European financial officials. He said the calls by the U.S. for more stimulus money and international aid likely will stir controversy at the upcoming meetings. Geithner on Wednesday called for a tenfold increase in the size of an emergency fund the IMF uses to help countries in trouble -- to as much as $500 billion. He also endorsed the IMF's call for countries to enact stimulus packages worth, on average, 2 percent of their GDP. But in a report last week, the IMF said the U.S. was the only one of the world's seven rich industrial nations -G7- on track to meet that goal. "I think that the United States has actually taken a significant lead on a number of these steps that are required," President Obama said Wednesday, calling for "concerted action around the global to jumpstart the economy" at the G-20 meeting. Some European nations are reticent to take on the kind of treasury finaning the US has been generating and those in the Euro Area are unable to, the money market opeations being entirely the ECB's responsibility. European critics have charged that the US demand for increased stimulus spending is an effort to divert a European call for a major overhaul of financial regulations governing cross-border big banks especially. At a meeting this week finance ministers of the 27-nation European Union, officials said they were doing enough already to support the world economy. "Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking," Luxembourg Finance Minister Jean-Claude Juncker was quoted as saying after the meeting, with other thoughts on his mind as he next day declared that his state's banking secrecy would be ended, alongside Austria and Switzerland. German Finance Minister Peer Steinbrueck recently said finance ministers from the EU's 27 nations were not pleased at U.S. suggestions that Europe has not done enough to stimulate the global economy. Germany has been criticized for its reluctance to spend and stimulate its economy, Europe's largest, which is a long term accusation. Germany has for 20 years focused on export-led growth, which has not succeeded well except for 2005-2007. But whether to do domestic internal stimulus or not has been a sharp-edged internal political debate. Their stimulus package was about 1.5% of its GDP this fiscal year is taking fiscal prudence far to theologically. France's was about half that, but will now expand.(Meanwhile, countries like China and Saudi Arabia h\ve or exceeded the United States' level of stimulus spending.) European nations apparently are preparing to sign on to at least a partial version of the calls by the US and UK for more IMF funding. The Times reported that the EU is considering lending between $75bn and $100bn towards the IMF doubling of its lending ability from $250bn to $500bn, but that is likely to need doubling again in the second half of 2009. Calls to boost the fund have mounted as developing countries hit hard by the global downturn, particularly in Eastern Europe, have so far tapped about $50bn from the IMF since November. It's unclear whether European nations will go as far as Geithner is suggesting in helping the IMF, however. Bryant said a number of European countries favour raising some of the money from China, but that's just a diversionery long-shot. Japan is committed to lending an additional $100bn. President Obama said, "Everybody understands that we're in this together. I think the G-20 countries are going to be seeking a lot of cooperation." Geithner said he would seek to build a "new consensus" on how to establish a "substantial and sustained program of support for recovery and growth."

COMMITTEE OF EUROPEAN BANKING SUPERVISORS

Work Programme 2009
Progress made in 2008
1. The activities undertaken by CEBS in 2008 were very much focused on four topics:
• Dealing with the unfolding crisis situation on the financial markets, amongst others by addressing the projects mentioned in the EU roadmap on the market turmoil and facilitating our members;
• Addressing the follow-up work from the conclusions of the Lamfalussy review, especially with regard to the strengthening of the role of CEBS as a level 3 committee as set out in the EU roadmap on financial institutions;
• Providing technical advice to the EU Commission on CRD-related issues, including the finalisation of the advice on own funds, large exposures, liquidity, national discretions and the work on the impact of the CRD in the economic cycle;
• Giving further guidance in the delivery of the Capital Requirements Directive by our members which has now been implemented by our members.

2. On the unfolding crisis situation CEBS has stepped up its co-operation amongst members, facilitated swift information exchange (e.g. by means of conference calls), developed guidance as endorsed by the ECOFIN on the disclosures by banks as the crisis situation was unfolding, monitored the implementation of this guidance, analysed the problems associated with the valuation of assets that became illiquid, provided recommendations, as endorsed by the ECOFIN, to banks and accounting standard setters on this topic, provided comments on the proposals made by the EU Commission on regulatory changes, developed a process for delivering periodic risk assessments to the EU institutions and provided a first assessment mid this year to the EFC-FST. In addition, CEBS has contributed to the development of the MoU that has been established between supervisors, central banks and Ministries.

3. On the implementation of the EU roadmap on the Lamfalussy review, CEBS has agreed mid 2008 to implement Qualified Majority Voting, established its Review Panel, has facilitated the co-operation and co-ordination within colleges of supervisors and the monitoring of their functioning and developed a time-line for the delivery of a fully harmonised supervisory reporting system by 2012.

4. With regard to the advices to the EU Commission CEBS finalised its advice on own funds with a special focus to the treatment of hybrid capital instruments, issued an advice on the large exposures rules in the EU which is geared towards managing the idiosyncratic risk of a default of individual counterparties, has issued an advice on liquidity and will advise the EU Commission on the deletion of national discretions and options that are now part of the CRD but hinder a sufficiently converged treatment amongst EU member states.

5. On level 3 guidance, CEBS prioritised its work such that planned activities linked with the implementation of the EU roadmaps were given the highest priority whereas other areas have been postponed. Key areas on which level 3 guidance has been developed, were operational networking and colleges of supervisors, liquidity risk management, transparency and disclosure and valuation of illiquid assets.

6. Given the need to prioritise, Pillar 2 implementation issues, especially those related to diversification benefits arising from internal economic capital models (ECMs), based on assessments conducted by joint examination teams on a sample of EU groups, and on the level of application for Internal Capital Adequacy Assessment Processes (ICAAPs) have been postponed until 2009.

7. In developing its initiatives, CEBS has further intensified its dialogue with its external stakeholders. More specifically, for key areas on which CEBS developed initiatives, industry expert groups have been set up that provided technical expertise in the process. Furthermore, the dialogue with its Consultative Panel has intensified and CEBS has held hearings on every important topic.


Projects for 2009

Prioritisation

8. CEBS has identified the topics it needs to work on in the future. In order to be able to react swiftly to the changing situation on the financial markets, CEBS will utilise a strict prioritisation scheme in planning and executing its activities. To this end, a distinction is made between:
• Priority 1: these activities are key and need to be delivered within the agreed upon time schedule. Resources will firstly be allocated to these priority 1 activities.
• Priority 2: these activities are important for CEBS to deliver but could to some extent be postponed, if necessary.
• Priority 3: these activities will only be undertaken in as far they do not conflict with the resources needed for priority 1 and 2 activities.
Given the changing developments in the financial markets, priorities can be changed in the course of 2009. Both the Extended Bureau and the Consultative Panel will be instrumental in this re-prioritisation exercise and changed priorities will be formally agreed upon at CEBS main committee meetings. Priorities in the work programme have already been revised to take account of the G20 roadmap, for which CEBS has been tasked with a number of deliverables at the European level.

Key activities for 2009

9. The highest priority has been given to CEBS’ activities in relation to the current crisis situation and to CEBS’ deliverables connected to the EU roadmaps. More specifically, CEBS has identified the following projects as being high priority projects for delivery in 2009:

• Crisis management: Given the current market situation it goes without saying that crisis management is paramount to CEBS and its members in our day-to-day supervisory practise. CEBS will continue facilitating as far as possible adequate information exchange between members and will provide guidance on topics of common concern and/or interest. In this regard, CEBS plans:
• to set up recommendations on the functioning of colleges of supervisors in a crisis situation,
• to implement practical tools at the level of the CEBS secretariat to facilitate information exchange between members in the current crisis situation,
• to analyse the supervisory implications of the national “rescue plans” and to look at crisis events by analysing the approaches taken by supervisors and supervisory tools applied.
Due to the unfolding of the crisis, the crisis management exercise in which CEBS would participate has been postponed.

• Early intervention mechanisms: the EU Commission is developing a white paper on early intervention tools for which a request for assistance has been sent to CEBS. CEBS’s review panel is currently preparing an overview of ‘all pre-liquidation stabilisation measures’ available at national supervisors for achieving timely solutions at a troubled institution as well as under which conditions these measures can be used. There is a genuine interest to EU supervisory authorities to comment on this EU initiative and if necessary to develop policy-recommendations, especially with a view to having a sufficiently streamlined approach for these tools for cross-border operating banking groups.

• Transparency, disclosure and valuation: CEBS presented mid 2008 its good observed practises on adequate disclosures concerning assets that are relevant in the current market situation. In 2009 the major EU cross-border operating banks will for the first time disclose Pillar 3 information. CEBS will assess both the adequacy of the end 2008 disclosures of banks a well as the upcoming Pillar 3 disclosures presented to the market, and will present, if necessary, policy recommendations to increase the quality of these disclosures. CEBS will also assess the progress made by the banking industry in enhancing the transparency of securitisation activities and will follow-up on its 2008 report on issues regarding the valuation of complex and illiquid financial instruments.

• Periodic risk assessments: in 2008, CEBS developed a mechanism on how to perform on a periodic basis focused risk assessments, building upon a macro-economic analysis provided by the Banking Supervision Committee. In 2009, CEBS will continue to deliver these assessments to identify important risk areas, their relevance to banks, the measures banks have taken to mitigate these risks and possible policy responses needed.

• Liquidity risk management: in 2008 CEBS developed recommendations for liquidity risk management and supervision and presented its proposal for regulatory changes. In 2009 CEBS will do the follow-up work, as already announced in its 2008 products. More specifically, CEBS will develop more detailed guidance on the composition of liquidity buffers and the definition of the survival period, as well as on internal transfer mechanisms, will develop criteria for assessing internal methodologies and will explore the possibility of developing a minimum set of common quantitative and qualitative information requirements.

• Colleges of supervisors and other network mechanisms: The current market situation and the actions taken by supervisory authorities demonstrate that supervisory cooperation, coordination and information exchange is of the utmost importance. Promoting supervisory cooperation and coordination through colleges of supervisors has been high on the agenda of CEBS since its inception, by fostering the functioning of colleges of supervisors and tackling issues raised by members or the Industry Platform on Operational Networks. CEBS will draw lessons from the current experiences in order to improve the current cooperation and coordination supervisory mechanisms in place, as well as identify possible other networking mechanisms.

• Guidelines on hybrid capital instruments: As part of the follow up of CEBS proposals on hybrid instruments, which has translated into European Commission’s proposals for revising the CRD, CEBS will elaborate operational guidelines on the precise criteria for hybrids instruments to qualify as capital for regulatory purposes.

• Supervisory reporting: In 2008 CEBS and CEIOPS developed a plan to introduce harmonised supervisory reporting by 2012. This plan has been endorsed by the ECOFIN. In order to have the framework accomplished in the agreed upon timeframe, several deliverables need to be agreed upon already in 2009, both on COREP and on FINREP.

• Training programmes: In 2008, CEBS agreed with the other level 3 committees to develop as of 2009 a number of 3L3 training programmes. To some extent, funds have been provided by the EU Commission to undertake these programmes. 2009 will be a pilot year in which a first 3L3 programme will be run and a structure will be set up within the secretariats to manage the trainings.

• Securitisation: In 2009, the revised CRD should modify the supervisory treatment of securitisation activities. CEBS will work on the implementation guidance of the revised regulation, notably on retention clauses.

• Pillar 2: Pillar 2 is an area in which at the moment there are quite divergent practises amongst member states. In a number of these areas it is felt important to further develop a more harmonised approach, more specifically as regards:
i. Guidelines on the joint assessment process
ii. The range of practices between supervisory approaches to stress testing under Pillar 2
iii. Concentration risk

Priority 2 activities for 2009

10. Besides ongoing topics like the monitoring of accounting & auditing standards, the development of guidance on the implementation of the 3rd EU anti money-laundering directive, the handling of Q&A’s on the implementation of the CRD and COREP & FINREP and the yearly Peer Review exercises, CEBS plans also to address the following topics as priority 2 activities in 2009:

• Pro-cyclicality: CEBS has been invited to work in an EU working group on the topic of pro-cyclicality. CEBS already acts as a joint sponsor of the TFICF (together with the BSC) aiming for analysing the effects of the Capital Requirements Directive on the economic cycle. Also in the BCBS and the FSF work is being undertaken in this area. CEBS plans to liaise as much as possible with these work streams. In addition, CEBS will analyse the impact of declining capital levels.

• Amendments to the CRD: especially in 2008, a number of changes in the CRD have been initiated by the EU Commission to be effected in the coming years. In 2009 CEBS will be monitoring these upcoming changes and might develop level 3 tools, partly as spin-off of work already undertaken in 2008 in the different calls for advice or already announced in these advices. Apart from the work on hybrid capital instruments and the guidelines on securitisation, which are assigned a high priority, areas for which this is planned, are:

i. Large exposures
ii. National discretions and options.
In addition, CEBS will elaborate guidelines on implementing the incremental default risk charge in the trading book, monitor the changes concerning home and host responsibilities, and might revise its tools for cross-border cooperation accordingly.

• Supervisory disclosure: CEBS developed in 2007 its guidelines on supervisory disclosure, specifically aimed at the Capital requirements Directive. The supervisory framework is now in operation. A number of topics have been identified to further improve the use of this framework. In addition, the scope of the current framework could be enlarged. In 2009 a study will be undertaken to amend the guidelines, which could take effect in 2010-2011.

• Financial conglomerates: In 2009, the IWCFC will focus its work on the Financial Conglomerates Directive, especially geared towards a study on the implementation of said directive in the different member states and possibly on the development of proposals for regulatory changes, dependent upon the outcome of this exercise.

• Mediation: CEBS has introduced the mediation mechanism among its members in its Charter. Until now, CEBS did not use this mechanism. For 2009, a case study will be undertaken to learn how this mechanism could be utilised in practise.

• Delegation: The three levels 3 Committees will work in 2009 to deal with any possible follow-up work to their 2008 work on delegation of decisions/responsibilities. Further they will also assist the Commission in the continued work with regard to the options for voluntary delegation of supervisory competences.

Priority 3 activities

11. A number of activities have been earmarked as priority 3 activities. These activities will only be undertaken in 2009, when CEBS will have sufficient resources available. Given the current situation in the financial markets, it is uncertain whether that will be the case. Topics that have a low priority include:
• The development of a range of practises paper under Pillar 2 on interest rate risk in the banking book
• Possible follow-up work on diversification under Pillar 2
• Work on business, strategic and reputational risk, on internal governance and on economic capital models
• The establishment of a CEBS network on the treatment amongst member states on hybrid capital instruments
• Some topics in the intermediate 3L3 work programme, like the guidance on internal governance, the periodic report on non-cooperative jurisdictions and the development of 3L3 fit & proper requirements
• Updating the guidelines on validation (GL10)
• Updating the Pillar 3 implementation study undertaken in 2007

Detailed template on the work programme 2009

12. A more detailed template on the deliverables that are foreseen for 2009 is provided in appendix. For every deliverable, it shows their priority, deadline and origin of the request.

Monitoring of progress and bottlenecks

13. As of 2009, the main committee will be informed on a quarterly basis about the progress of the work programme. Possible bottlenecks will then be identified and changes in priorities as proposed by the Bureau will be agreed upon.