Thursday, April 2, 2009

Surpise coming out of G20 - More money to IMF

Though many were not expecting much from the G20, we got a huge increase in credit with the announcement of a pledge to provide $1 trillion in credit. The Group will provide $250 billion to help finance trade over the next two years with a commitment to finish he Doha round of trade talks. The trade financing is critical to offset the decline in global exports. Many firms have not been able to gain financing to buy or sell goods, so this pledge will help unlock the shutdown in global commerce. Of course, this is after the World Bank has reported that 17 of the G20 have increased protectionist measures. The G20 also agreed to no new protectionist measures through 2010.

$750 billion will be used to increase the balance sheet of the the IMF. The IMF will have its balance sheet increased by $500 billion with another $250 billion coming through the creation of special drawing rights. This will provide more liquidity for all central banks which may reduce the need for bilateral swap lines.

A Financial Stability Board will be established with the IMF to provide warning of any financial threats. Hedge funds will be subject to greater oversight and tax havens will be monitored. They also suggested guidelines for executive pay.

The most important reaction was an explosion of stock prices on the upside with a dollar decline. The risk from holding weaker currencies was diminished so there was a nice appreciation in many emerging market currencies. Expect to see increases in commodity prices. Why hold fiat money when you can have hard assets.

No comments: