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G20 leaders very committed again – at least on paper

Jan von GerichThe statement from the G20 leaders contained a lot of good intentions again, but whether they will lead to any concrete implementation remains to be seen.

As expected, the most concrete step was increasing the IMF’s lending capacity by more than USD 450bn, which was slightly more than was pledged earlier in the spring, though not changing the overall picture notably. The statement again declared that we are united in our resolve to promote growth and jobs and we will work collectively to strengthen demand and restore confidence with a view to support growth and foster financial stability in order to create high quality jobs and opportunities for all of our citizens.

The main focus of course remains on what is going on in the Euro zone, and there was of course again an agreement that Euro Area members of the G20 will take all necessary policy measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks. Yesterday’s statement thus definitely continues to pave the way for a banking union, and such talks will continue later this week, when EU finance ministers meet, as well at the EU summit next week. The G20 statement elaborated that we support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance.

Of course, there was also reminder how committed Euro-zone countries are in boosting economic growth: The European Union members of the G20 are determined to move forward expeditiously on measures to support growth including through completing the European Single Market and making better use of European financial means, such as the European Investment Bank (EIB), pilot project bonds, and structural and cohesion funds, for more targeted investment, employment, growth and competitiveness, while maintaining the firm commitment to implement fiscal consolidation to be assessed on a structural basis.

On a more concrete level, according to anonymous officials, Italy’s Prime Minister Monti had called on activating the European Financial Stability Facility (EFSF) to start buying government bonds on the open market. The officials continued that Ms Merkel may also be willing to do more, but she was not ready to commit to any definite course of action yet.

There is of course no rush – or is there? The EFSF already, at least in theory, has the possibility for bond purchases, but this power has not been activated. However, it is good to note that in the current form, the chances that the EFSF could carry out notable bond purchases are slim.

For one, the facility is not prefunded, so it could only buy bonds at the pace it issues its own debt in markets, i.e. not very fast. This would obviously change, if the EFSF was given a banking licence and it refinanced its purchases via the ECB which would be a good idea. Such course of action, however, has been ruled out by at least the ECB and Germany. The goal of course has been to include the private sector in refinancing the bond purchases, but this option has not aroused any huge interest. The ECB thus remains by far the most credible backstop.

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