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We are all spillovers now: G20 finance meeting explained

Last year’s G-20 knees up. This year expect the taper, the IMF and corporate tax evasion to be the main themes. Flickr

Finance ministers and central bank governors from the Group of 20 major economies will meet in Sydney this week. A lot of troubled financial waters have flowed under the bridge since this group last met in Australia. That was at a 2006 meeting in Melbourne that sparked violent protest, before the G20 added a Leaders Summit.

So who is this group, and what has happened since they last met in October 2013? Where will the heat be in their discussions leading up to the Leaders Summit in Brisbane in November?

Glenn Stevens - global finance rockstar?

That got your attention. Most eyes will be on the new US Federal Reserve chief Janet Yellen in her first G20 outing as the Chair of the Board of Governors of the Federal Reserve System. (In doing so she will have increased the gender stats considerably but more on that in future columns).

It is Australian treasurer Joe Hockey’s time to shine as host, and his second meeting in this role (the first was in Washington last October). There will be big names like IMF chief Christine Lagarde (surely the only finance official anyone wants to watch on Q&A), World Bank President Jim Yong Kim, US Treasury Secretary Jack Lew, and Britain’s Chancellor of the Exchequer George Osborne.

Glenn Stevens- global finance rock star? AAP

But my contention is that the real rock of the meeting might be our own Glenn Stevens, who as Governor of the Reserve Bank of Australia since 2006, has been to more of these meetings than most leaders have had hot dinners.

You might only think about Stevens in terms of interest rates, but in fact the RBA plays an important role in coordinating policy with the other central banks of the “systematically important” economies to promote financial stability. On its website it goes by the catchy title ‘About International Regulatory Fora’.

What will they be discussing?

So first thing, download the Financial Jargon Buster from the Transparency International website and prepare to wow your friends at dinner parties. Top of the agenda this time will be the implications of US “tapering” or “quantitative easing”.

So much economic language has a sort of poetry to it, it took me weeks to realise what the concept “spillovers” could mean for ordinary people outside the US. As Treasurer Joe Hockey told the Lowy Institute recently: “in a globalised world every policy action taken in isolation has a spillover”.

This is another way of saying that actions taken by US policymakers - such as tapering the bond-buying program known as quantitative easing - affect other markets due to the globalised nature of finance and markets.

QE is designed to stimulate the economy, but also supports financial market performance. The Fed buys fixed-income securities on the open market in order to bring down long-term interest rates.

Throughout 2013, the Fed purchased US$85 billion of fixed-income securities per month - US$40 billion of mortgage-backed securities and US$45 billion of US Treasury Bonds. In May 2013, then-US Federal Reserve Chairman Ben Bernanke’s suggestion that the Fed would “taper” - or reduce over time - the size of its quantitative easing triggered a dramatic sell-off in emerging market currencies, stocks and bonds and a flight to the US dollar.

Since then emerging markets have reported an “exodus of cash, with their 20 most-traded currencies falling more than 5%”.

In December, the Fed actually started tapering by $10 billion per month, to $75 billion, and in late January, it announced that it would further reduce its buying by another $10 billion to $65 billion per month, with the program probably finishing in 2014. In Australia, the interest is in the exchange rate, bringing down the Australian dollar.

US Federal Reserve Chief Janet Yellen will be discussing the taper. AAP

Tapering and IMF reform - bringing the heat in Sydney

This was a hot issue in the St Petersburg G20 meeting - Zhu Guangyao, China’s vice finance minister urged the United States to be “mindful of the spillover effects” of the planned tapering implying that such action may not contribute to “the stability of the global financial markets, and the steady recovery of the global economy”.

India’s central bank governor Raghuram Rajan came out swinging a month ago (and we should be mindful of the current context of strained US-Indian diplomatic relations here), saying that “international monetary co-operation has broken down”.

This raises the question - should the US Fed be more mindful of the international implications of its decisions? Or is it naive to expect central banks to take decisions on a basis other than national priorities? Should the biggest economies be mindful of the poorest or most exposed economies, as well as each other? Perhaps the first step lies in better communication strategies, which is what G20 meetings like these should serve to promote.

Joe Hockey will have a volatile meeting on his hands. AAP

Google and Congress: US under scrutiny in Sydney

To add salt to the QE wound, US Congress again refused to push through changes that would have allowed the International Monetary Fund to give emerging markets such as China, Brazil and India greater say in the IMF’s operations. The US is the IMF’s largest shareholder and the only holdout that has not authorised the changes, which were agreed in 2010. This is a test of the overall legitimacy of the G20 and it will colour the tapering conversation in Sydney.

Another bone of contention will be progressing the corporate tax evasion agenda (again, known as the catchy Base Erosion and Profit Shifting or “BEPS” agenda). This is the best PR the G20 has had in years, with many cheering the idea that corporate tax evasion could be stopped and the G20 could be the body to achieve it, by working through the OECD to increase transparency and close loopholes in a coordinated fashion.

But the Digital Economy Group, featuring Google and other US tech giants, has written to the OECD, denying that internet companies have been gaming national tax systems.

So Mr Hockey and Mr Stevens may have quite a volatile meeting on their hands. It certainly won’t be all koalas and harbour views for Ms Yellen.

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