BCM International Regulatory Analytics llc

The Risk Telescope — Disarray & Dissonance

At the end of a wild  week, we are arguably worse off than we were on Monday:

• German Chancellor Merkel has publicly admitted little investor appetite exists for the European Financial Stability Facility (EFSF) bonds, even with a sovereign guarantee.  Reports indicated that Germany also rejected increased involvement by the IMF in the EFSF.

• Greece famously flirted with engaging the democratic will of the people through a referendum and negotiating yet concessions from banks, then backed off when it looked like such a move would jeopardize the flow of funds from the eurozone and the IMF to Greece.

• Italy’s bond market experienced renewed pressure despite European Central Bank (ECB) purchases.  The Prime Minister indicated that the IMF had offered liquidity facilities and Italy had turned it down because it has a strong economy.

• A mid-sized U.S. brokerage house filed for Chapter 11 bankruptcy in the United States, due in large part to losses on its eurozone sovereign debt holdings.

• G20 heads of state left Cannes without agreement on what kind of lifeline — if any — the global community would provide to the eurozone or its individual members.

• Europe began considering how a member of the eurozone could leave.  Eurozone leaders made clear that while they would prefer Greece to remain in the eurozone, the first priority was to protect and preserve the common currency…and they were willing to trigger a hard default in Greece by denying disbursement of the latest tranche of IMF bailout funding if Greece did not comply with the eurozone’s terms and conditions.

• Some Eurozone leaders spent the last few days seeking a change in government because only a-political “unity” caretaker governments have been able to make the unpopular decisions required to implement austerity measures that accompany EFSF/eurozone/IMF packages.  As of tonight’s vote in Greece, it looks like they succeeded.

And yet the Financial Stability Board (FSB) issued no less than eight (8) major policy papers in the run-up to the G20 summit, none of which acknowledged the splintering of geopolitical interests among its members.  On the regulatory and financial policy fronts, it seems, the policy mantra remains “full speed ahead” in terms of crafting global consensus-based solutions that require mostly peer pressure for enforcement…despite glaring problems in implementing the reforms agreed two or three years ago in the G20.  In addition, the G20 shows signs of increasing its institutional heft by establishing a secretariat for its leadership and promising to undertake more outreach to the United Nations.

Disarray in Cannes thus seems likely to sow the seeds of increased systemic risks in the near-term.  Risk managers, investors and advocates must consider carefully now whether the G20 can actually deliver on its intended goals.  If the leaders of economies representing at least 85% of world GDP cannot craft a plan to provide financial stability when faced with a real and growing crisis, how can their more ambitious long-term policy goals be credible?

This issue of The Risk Telescope focuses on the main G20 outcomes and their implications.  Section I focuses on the eurozone situation in the G20 context.  Section II focuses on the IMF reforms that were supposed to be the centerpiece of this week’s meetings and instead have been sidelined.  Section III focuses on financial and regulatory policies addressed in the communique.  Section IV assesses the growing institutional footprint of the G20 and the FSB.  Section V concludes with the somber assessment that the centrifugal forces identified earlier this year are accelerating, decreasing the incentives for sovereigns to cooperate.