G20 Leaders – Going Overtime

One of the items on the agenda of the last G20 meeting was the sensitive issue regarding bankers’ bonuses. Remember, many people blame the overly exaggerated bonuses handed out by banks to their top employees as one of the main reasons for the financial meltdown. How so? These bonuses attracted bankers to take on additional short term risks for the immediate cash payoffs. Their actions eventually led to too many bad loans, which led to defaults, which… brings us to the mess that we are in today.

To address this, the G20 decided to plan a framework on global standards on bank bonuses in hopes of reducing risk. The G20 wants banks to “claw back” cash rewards if earnings fall. In addition, they want banks to tie compensation with long term performance and to disclose more information on how much they pay top executives. Suspiciously, the US, UK and Canadian leaders stood somewhat opposed to these changes… hmm.

Among the things discussed at the summit was the G20’s pledge to continue employing stimulus measures in their economies. The reason for this is to further support the global economy’s journey to recovery was the primary concern of currency traders. Financial ministers, once again, remained cautious, as they all vowed more financial support until recovery was certain. According to summit participants, the accommodative stance taken by major central banks may last well into 2009. Understandably, it seems that they are still as wary as I am. I mean if all this “recovery” we are seeing is driven only by fiscal and monetary stimulus, what will happen once the stimulus is gone?

Nobody knows for certain but the G20 nations did agree that there is a need for a sound and transparent process when the time to unwind the extraordinary monetary policies implemented arrives. I’m guessing all these financial “experts” are looking for more signs on whether the economy will be able stand on its own two feet.

None of this was surprising for traders really, as the outcome of the G20 summit was well within their initial expectations. In fact, the first day of the summit did little to the currency markets. Instead, the market participants focused more on the positive results of the NFP report. The headline numbers showed that firms logged their smallest job loss since August 2008, giving risk appetite a serious boost. The good news from the NFP report overshadowed everything else.

Higher yielding currencies could continue to benefit in the long run as the G20 pledges to coordinate an exit strategy on their stimulus programs sometime in the future. The “anti-dollars” may profit once their respective economies indicate a definite exit plan. On the flip side, the USD may also take cue once the US Treasury and Federal Reserve lift their easing programs.

In Pittsburgh next week, the G20 will be having another summit. Aside from reviewing the progress made since the Washington and London summits, world leaders are set to discuss further actions to assure a sustainable recovery from the global economic crisis. On the agenda are ironed-out measures concerning bankers’ bonuses and proposals to radically reform the International Monetary Fund. Another issue to be tackled is the undercapitalization of banks, with all finance ministers agreeing that financial institutions need to raise more capital to strengthen their balance sheets. With detailed plans expected from world leaders by next week, the Pittsburgh summit should be able to strengthen the coordination among the countries’ macroeconomic policies and to speed up the reforms of the international financial institutions.

Will we finally see concrete plans after the Pittsburgh summit? Or will G20 leaders be “all talk” once more? For now, all that can be said is that the G20 will continue to monitor closely all the developments in the global economy before they fashion some definite concerted actions. I dont blame them for being careful – the fate of the global economy is in their hands. Lets give them a break – I mean, they are giving up their weekends right?