11 October 2011
Stewart Fleming
(Former Chatham House Expert)


Next month's G20 Summit in Cannes is building up to be just as important a 'crisis management event' for the world economy as the London Summit in April 2009. 

Back then, the objective of the summit was to try and halt the downward spiral in global growth triggered by the US sub-prime crisis and the bankruptcy of investment bank Lehman Brothers. This time, the objective is to put in place new initiatives that seek to prevent Europe's sovereign debt crisis from tipping the transatlantic economies into a double dip recession, perhaps triggering a global slump.  

At the top of the Cannes agenda, assuming the negotiations now underway are successful, will be a far reaching restructuring of the eurozone's strategy for tackling Europe's sovereign debt crisis. A bigger role for the IMF is on the cards, provided China and other surplus nations agree to provide more cash.

In Frankfurt last week, Jean-Claude Trichet, President of the European Central Bank, underscored the bank's determination to retreat from its leading role in Europe's debt crisis, in particular its internally divisive Securities Market Programme. 

'We expect governments [not the ECB] to be responsible for restoring financial stability,' in Europe, Trichet said. He added that the ECB did not believe, either, that it should start lending to the eurozone's specialist crisis management agency, the European Financial Stability Facility. 

These comments strongly suggest that the EFSF - which is widely seen to be lacking the financial firepower needed to fight financial market pressures on countries like Italy and Spain - should look elsewhere for support. Under discussion now is whether the IMF, already engaged in bail-outs in Greece, Ireland and Portugal, could, in combination with the EFSF, largely replace the ECB. 

Since Christine Lagarde, Managing Director of the IMF, has said that the IMF would also need more firepower than the $400 billion currently at its disposal, this raises the issue, as in 2009, of how the IMF can find a way to tap extra sources of finance. There is speculation that Middle East oil producers and emerging market countries, especially China, which have abundant foreign exchange reserves at their disposal, could be major contributors alongside advanced economies which also have healthy reserves, such as Japan.

In parallel, uncertainty hangs over how to bolster Europe's fragile banking system, including in Eastern Europe. Europe's leaders now accept that the injection of new capital into weak banks is critical, not least because they will have to take a bigger hit from the planned revision of the Greek sovereign debt bail-out now being negotiated.  

It remains an open question whether the re-capitalisation of weakened banks can be accomplished by private markets, governments, or the IMF and the EFSF, or by involving other international financial institutions and agencies. That it has to be done is no longer in question. Many of the regions banks are finding it close to impossible to raise - in the private markets for unsecured bonds - the huge sums they urgently need in order to finance their day-to-day lending. 

Markets will be keeping a close eye on the G20 finance ministers meeting this weekend to assess progress.