On November 15, the heads of government from the world’s most powerful nations will meet in Washington to discuss how to restructure the global financial system.
They will be gathering against a background of the market turmoil that has resulted from unregulated credit ratings agencies overrating sub-prime mortgages in the US, a problem that gave value to worthless paper and which, when realised, has brought down banks, has caused governments across the world to have to lend huge sums to financial institutions and has triggered a global recession.
By common consent these problems have not been helped by there being outdated multilateral financial institutions or systems of regulation and oversight designed for a slower and less joined-up world.
When these leaders meet they will be considering changes to a global financial structure put in place at a time when economic globalisation, instant communications, twenty-four hour live television news coverage, electronic connectivity between markets, the economic power of China, Brazil, India and Russia and the power of other factors to move markets was scarcely conceivable.
The November 15 summit and its associated meetings will therefore take as their starting point the institutions and regulatory mechanisms established by the 1944 Breton Woods Agreement which created the World Bank and the International Monetary Fund and the present global financial architecture. In theory, the November meeting will create a new global structure that will try to relate institutions and their actions to the way the world is now. Thus at the meeting Europe will propose eleven measures on which it is seeking international support.
These, as the French Finance Minister has suggested, will be to ensure that “no financial product, no financial player and no jurisdiction will remain outside the scope of regulatory application.”
Europe will be seeking agreement on, among other issues, a regulatory framework for credit rating agencies, strengthened cross-border cooperation between supervising financial authorities, the revision of international accounting rules, and the promotion of systems of remuneration in financial institutions that do not encourage excessive risk-taking.
More generally the meeting is intended to strengthen the responsibility and functioning of the financial sector, create long-term stability, ensure that cross-border financial institutions are evenly supervised and create a larger and less prescriptive role for the IMF. Other issues that are likely to be discussed include a range of best practice measures intended to make banks more transparent in relation to their underlying securities, better capitalised, and more rigorously regulated and supervised internationally.
What all this indicates is how perilously close the international banking system, hedge funds and other newer financial approaches came during the last few months to creating a global financial meltdown taking with it rich and poor alike, and destroying companies, savings and pensions, to say nothing of the small enterprises and industries across the world that provide work and a wage to many hundreds of millions.
Whether the Washington meeting in November can make any real or far-reaching progress is however far from certain. While it is essential that it takes place, it will be led by a lame duck US President with everyone present consciously aware that it will be for his Democrat successor, Barack Obama, to determine how the US will ultimately respond. Also the absence of smaller developing nations like those in Latin America and the Caribbean raises questions about the basis for reaching a fully enforceable global consensus. And more worryingly, its outcome seems likely only to reflect the concerns of the world’s wealthier nations in trying to find new ways to have global institutions channel their thinking.
An example of this that touches on the Caribbean is the possibility that some nations participating may seek to find ways to severely curtail, regulate, supervise or even end the offshore financial services industry that has grown up internationally and in many of Europe’s overseas territories in the region and elsewhere.
Among those who believe that there is a need to fully regulate if not end the role of offshore financial centres, include the leaders of Germany and France, and it is said, the British Prime Minister. Interestingly, support for this in the United Kingdom has come from a politician who throughout the financial crisis has vocalised actions that have subsequently been adopted by government. Speaking recently Vince Cable, a Liberal Democrat Parliamentarian who speaks for his party on finance, said that the British Treasury should tell banks receiving investment from the government to close their operations in offshore tax havens.
“It seems totally inappropriate for banks funded by the taxpayer to be systematically avoiding British tax or helping customers to do so.
The anomaly of the nationalized banks will bring this issue to a head… I would like to see the Channel Islands, the Isle of Man and British dependent territories in the Caribbean closed down as tax havens,” he said. “How can we have any form of tax integrity if territories under British jurisdiction are helping rich individuals and companies avoid the tax which other citizens pay?”
The argument behind this which seems to be gaining credibility with the UK Treasury is that tax havens weaken government’s regulatory and tax hold on banks and their customers. Because, it is said, such offshore institutions escape regulation, there is the possibility that they may undermine other regulatory systems.
If such an approach were to be applied – and it is by no means certain that there is enough of an international consensus – it could result in a serious contraction in the economies of some of the smallest but most viable Caribbean economies that have based their economic model on a mix of offshore financial services and up-scale tourism.
Recently the French President Nicolas Sarkozy noted that the 21st-century world cannot be governed with the institutions of the 20th century.
In this he is correct. However, it also seems necessary that in developing new approaches there needs to be a mechanism that ensures that the interests and views of smaller governments and central banks from regions like Latin America and the Caribbean can be factored in.
Previous columns can be found at www.caribbean-council.org
