3 Takeaways From the G20 Meeting

Over the weekend finance ministers and central bank governors of the G20 countries had a meeting in Washington. For economic newbies out there, the Group of 20 nations (G20) represents 85% of global gross domestic product, over 75% of global trade, and two-thirds of the world’s population. Here are three main points to note from last weekend’s meeting:

1. Members reiterated the commitment to global economic growth.

While the members believe that economic growth will strengthen in 2014, they’re also mindful of the possible global risks.

They have committed to present “realistic and concrete” measures to achieve balanced growth and emphasized the importance of structural reforms, exchange rate flexibility, and addressing gaps in policies to lift their collective GDP above 2% over the next five years.

2. Some market-moving issues were notably absent.

Aside from a few words about monitoring economic developments in Ukraine, the G20 communiqué didn’t really touch upon other market-moving and equally important issues. For instance, there was no discussion of Russia’s economic sanctions, the yuan’s recent weakness, and the Fed’s tapering schedule. Guess we’ll have to wait for individual speeches to see how the G20 officials feel about these issues!

3. The U.S. has the end of the year to approve the IMF reforms agreed back in 2010.

The most controversial takeaway from last weekend’s meeting is the members’ disapproval over how long it’s taking the U.S. government to sanction the agreed-upon reforms for the International Monetary Fund (IMF).

Back in 2010 the members have agreed to boost the IMF’s lending authority and give emerging markets a bigger voice in controlling the funds. Among other things they have agreed that the Washington-based global lender should double its quota – in effect its equity capital – to 720 billion USD. This would necessitate the Congress to transfer around 63 billion USD of U.S. contribution from a temporary to a permanent fund and restrict the U.S.’ ability to block loans to other nations.

Voting shares of emerging markets, such as China, Brazil, and Turkey, would also be raised from 42.1% to 44.7%. Last but not the least, 2 of the 24 IMF directorships would also be transferred from European to developing countries. The changes require approval by 85% of the IMF’s voting shares and the U.S. is the fund’s largest member with 16.7% of the vote.

IMF First Deputy Managing Director David Lipton warns that the deadlock makes the emerging markets less likely to approach the fund for aid and could prompt them to form their own regional organizations. This is probably why the communiqué is also threatening that if the U.S. doesn’t approve the 2010 reforms by the end of the year, then the IMF could start thinking of other options to make it happen. Yikes!

Market Reaction

The members’ disapproval over the IMF reforms, as well as bearish speeches from ECB officials, have caused weekend gaps among major currency pairs. EUR/USD opened 44 pips lower than its Friday closing price while USD/CHF opened with a 23-pip gap. Most of the gaps were quickly filled though, and didn’t affect price action much for the rest of Monday’s Asian session.