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  A Summit at the Abyss: Can the G-20 Save the World?

A Summit at the Abyss Can the G-20 Save the World?

By SPIEGEL Staff

Part 4: A Developing Disaster in the Developing World

Meanwhile, many EU members are all the more energetic when it comes to protecting their own markets against too much competition from other European countries. For example, automaker Renault, responding to pressure from the French government, is shifting production from Eastern European countries back to France.

Experienced Eurocrats fear that if the German government decides to take a stake in stricken carmaker Opel, it could trigger a wave of protectionism. Other governments would begin subsidizing troubled industries or buying up shares in ailing companies.

Emerging nations have also turned to protectionist measures. Russia, for example, is raising duties on used cars, China is tightening import requirements for food and India is banning Chinese toys.

Ironically, the European Union is still seen as a model of multinational cooperation in many parts of the world. But when push comes to shove, the member states resort almost exclusively to national solo efforts. This has been the case with the bank bailouts, with each country arriving at a different solution, none of which has been completely successful to date. Great Britain, for example, opted for a government insurance solution that allows banks to insure themselves with the government against default on their toxic securities, as long as they disclose the securities.

'Out of the Drawer'

Contrary to what it has indicated thus far, the government in Berlin does not intend for now to develop a plan to relieve German banks of their toxic securities. Sources in Berlin say that if the situation doesn't deteriorate further, the existing bank bailout program will be sufficient.

Only if large segments of the banking sector or other important institutions are threatened will the government pull new measures "out of the drawer."

If that happens, affected financial institutions would spin off their troubled assets into a separate "bad bank," which would be partially owned by the government. In exchange for these shares, the healthy portions of the institutions would receive non-negotiable government bonds. Equipped with such solid assets, the banks could devote themselves to their actual business once again: lending their customers money. The spun-off toxic securities would be liquidated over a period of 15 to 20 years. The healthy banks would reimburse the government for any losses it incurred as a result.

The captains of the economic Titanic will not discuss the details of this set of issues at their London meeting. As a result, the agenda of the upcoming financial summit seems oddly unfocused.

The world leaders plan to talk about all kinds of things in London, from economic stimulus programs to the balance sheets of hedge funds, and from banking supervision to executive compensation. But they will only address the most important program as a secondary issue: A truly comprehensive, lasting and future-oriented cleanup of the infirm financial sector. In this respect, the group of officials set to attend the summit can already be likened to a fire truck pointing its hose at a collection of houses, just not at the one currently in flames.

There is another crisis issue to which the club of industrialized countries will devote only marginal attention: the devastating economic downturn in the developing world.

Problems in the Developing World

Only a few months ago, leaders in Asia, Africa and Latin America insisted that the crisis would not affect their countries. What did they have to do with derivatives, Wall Street and speculative transactions? In fact, they were celebrating growth rates of up to 6 percent and were convinced that their financial systems were immune, because their banks are hardly connected to the global financial market.

It is clear today that nowhere will the effects of the global crisis be more brutal than in the world's poorest countries. The scope of the economic downturn in the developing world is becoming more dramatic from one month to the next.

Africa's stock markets have fallen by an average of 40 percent. Ghana and Kenya have delayed the issue of government bonds worth more than $800 million (€590 million), thereby postponing the construction of important roads and natural gas pipelines.

In its report on preparations for the G-20 summit, the World Bank predicts that the global economy and world trade will shrink for the first time in 60 years, and that the weakest countries will be the hardest hit. In the next two years alone, the developing world could face a financing gap of $270 billion (€200 billion), which could grow to up to $700 billion (€520 billion).

In addition, much of the financing for major projects is vanishing into thin air because capital is either no longer flowing or is being pulled out. In Senegal, a $2 billion (€1.48 billion) iron ore mining project in the Falémé region has been delayed because the government's partner, steel giant ArcelorMittal, is in financial difficulty due to a drastic decline in the price of iron ore since the contract was signed.

Indeed, most developing countries are no longer in a position to help themselves and find a way out of the crisis. According to World Bank President Robert Zoellick, only one in four countries has the necessary economic strength for stimulus programs.

One Percent for the Poor

"We don't want handouts, but fair rules," says South African Finance Minister Trevor Manuel, who, together with an Ethiopian, will have the distinction of representing the poor at the G-20 summit.

The developing world representatives will present the conference with a program that was developed by a group of former central bankers and economists, together with German Development Minister Heidemarie Wieczorek-Zeul. The commission proposes earmarking up to 1 percent of expenditures in the national economy stimulus programs for the Third World. It also wants to see the IMF's funds augmented and the distribution of votes in the organization reformed as quickly as possible.

According to the draft communiqué, the G-20 nations want to call upon the IMF to begin selling gold reserves and use the proceeds to help poor countries.

With all the talk of gold sales, financial market regulation and stimulus packages, the London summit will at least represent progress over previous years when it comes to rhetoric. But so far the foreseeable resolutions are nothing more than declarations of intent supported by scant details.

Bundle of Measures

Economists are already a few steps ahead. To prevent new credit bubbles and bank crises, they recommend an entire bundle of measures:

• The international rating agencies, which rate the creditworthiness of borrowers, should be paid by the buyers of securities in the future, not by the sellers. This would eliminate the current conflicts of interest.

• Trading in so-called Credit Default Swaps (CDS) must be banned. CDSs were developed as a sort of insurance policy for credit risks, but investors used them for speculation. This, says economists, must be stopped.

• The minimum capital requirements for banks, known as Basel II in industry jargon, must be tightened once the crisis ends, say experts, including Hans-Werner Sinn, the head of the Munich-based Ifo economic research institute. This would prevent banks from borrowing large sums of money without sufficient assets and betting the money on risky "innovative" financial products. A bigger capital cushion would have helped each individual bank weather the crisis more effectively in recent months.

• In the real estate business, mortgage banks should assume more responsibility, once again, for the loans they issue. The reselling, slicing up and repackaging of mortgage loans must be subject to tighter controls and documentation requirements.

But such concrete resolutions can hardly be expected to emerge from the London crisis summit. If anything, the heads of state will agree in principle on a set of rules, which government agencies and international bodies will then examine at length, discuss and possibly water down.

More important than the photo ops and balanced language of the final communiqué will be the changes demanded by reality. The consequences of the financial crisis will change the global economic order to a far greater extent than any resolution adopted at the London conference.

'Cannot Wait'

The world will remain in the tight grip of recession for at least another two years. Millions of people in Europe, America and Asia will lose their jobs, and the threat of social tensions and political conflict will grow.

The days are gone when the United States could more or less dominate the global economy. Europe's importance will grow, while emerging economies like China and India will expand their roles even further.

The philosophy of unbridled financial capitalism, which set the tone for years, seems to have reached the end of its line. Governments will play a more active role in the economy for many years to come, as they clean up the ailing financial sector, bolster the economy and develop a new order in the financial and credit markets.

Much will depend on how the industrialized nations control this massive process. Tensions are growing among the major economic blocs. Will governments take steps to achieve a modicum of international cooperation, or will they succumb to the temptation to pursue nothing but national interests?

In the end, it is clear that such questions will not be decided at summit conferences stage-managed to appear in the most favorable light possible on television, but in day-to-day government work: In assembling the next budget, defining a new export subsidy or deciding whether to save a domestic carmaker or allow it to go under.

No one will play as decisive a role in this process as the new American president. The United States has lost some of its importance, but it still plays a leadership role. If Obama unilaterally places US interests ahead of international cooperation, this will also shape the policies of other industrialized nations.

The new US president would be well advised not to base his decisions on his political role model, Franklin D. Roosevelt. He blamed his political decisions in 1933, which went on to have serious consequences, on the mood among the electorate at home. International agreements on world trade are important, he said at the time, "but the emergency at home cannot wait on that accomplishment."

By Dietmar Hawranek, Frank Hornig, Andreas Lorenz, Christian Reiermann, Michael Sauga, Stefan Simons, Janko Tietz and Thomas Tuma

Translated from the German by Christopher Sultan