World leaders agreed to take “whatever further actions are necessary” to tackle the financial crisis and restore global growth at an emergency summit of the Group of 20 in Washington on Saturday.
They set out an ambitious agenda for reform of the financial regulatory system and institutions such as the World Bank and International Monetary Fund and agreed to meet again in April to consider more concrete steps.
The 20 leaders, whose countries represent more than 85 per cent of the world’s gross domestic product, also vowed to use “fiscal measures” and monetary policy to shore up the world economy but stopped short of announcing a coordinated stimulus programme.
George W. Bush, the outgoing US president, declared the summit a “very successful” first step but acknowledged it would fall to his successor, Barack Obama, to take the process forward. The next summit will take place on April 30 – 101 days after Mr Obama takes office.
In a five-page communique setting out broad principles for reform and a detailed action plan, the G20 agreed to increase supervision of banks and credit rating agencies, tighten regulation of high-risk financial products such as credit default swaps, and “review” executive compensation practices.
In a blunt assessment, the communique blamed the crisis on, ”weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products and consequent excessive leverage”.
Without naming the US, the leaders concluded that ”policymakers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in the financial markets”.
The agreement represented a partial victory for European leaders who arrived in Washington with a range of proposals to tighten market regulations amid the most serious financial turmoil since the Great Depression.
”It is historic to have here in the United States an American administration -- where Republicans and Democrats have refused to move on issues such as these -- to have agreed to a shift,” said Nicolas Sarkozy, the French president.
But the US, which remains wary of heavy-handed intervention, secured a commitment that any reforms must be in line with free market principles.
In a statement after the summit, Mr Bush said: “Whatever reforms are recommended, we need to be guided by this simple fact: that the best way to solve our problems and solve the people’s problems is for there to be economic growth. And the surest path to that growth is free market capitalism.”
There was broad consensus on the need for an overhaul of the World Bank and IMF, including reopening the vexed question of shareholdings or ”quotas” to give emerging economies greater weight in these institutions.
A renewed pledge was also made to complete the Doha round of global trade talks, with a goal of settling the basic parameters of a deal before the year end, and all 20 leaders agreed to take no protectionist actions for a year.
The leaders said they would ensure that ”all financial markets, products and participants are regulated or subject to oversight, as appropriate” -- a catch-all line pushed by the Europeans.
However US officials denied that this meant direct regulation of hedge funds and other private pools of capital that are currently supervised indirectly through their bank broker dealers. The G20 noted that the hedge fund industry was developing best practice codes, and said ministers would review their adequacy.
The leaders also pledged a rapid effort to improve the resilience of over the counter derivatives markets, including the credit default swaps market - which is widely seen as a source of vulnerability for the global financial system. President Bush said there was agreement globally that CDS trades should be run through a central clearing house.
World leaders tasked finance ministers to examine the procyclical nature of both accounting and regulatory regimes for banks and report back by the Spring.
But US officials said this should not be read as an intention to retreat from mark to market principles.
There was agreement to set up colleges of national supervisors to regulate global banks. Finance ministers will also review compensation schemes in the financial sector, with a view to ensuring there are not excessive incentives for risk-taking.
The leaders agreed to open up a set of key committees that govern the rules of international finance to emerging economies, starting with the Financial Stability Forum (FSF) which has emerged as the key standards-setting body.
The absence of Mr Obama, who spent the weekend in Chicago, added a sense of uncertainty to the summit as leaders were left guessing whether the US approach will change after he takes office.
Mr Obama sent two emissaries – Madeleine Albright, the former secretary of state, and Jim Leach, a former congressman – to meet the visiting G20 delegations but they played no direct part in the summit.
In a statement afterwards, Ms Albright and Mr Leach said the president-elect believed the summit was “an important opportunity to seek a coordinated response” to the financial crisis and conveyed his “determination to continuing to work together on these challenges after he takes office in January”.
The summit was billed as the most important economic meeting since the Breton Woods meeting in 1944, which produced the architecture for the post-world war two economic system.
While the US has sought to downplay comparisons with Breton Woods, there was a clear sense in Washington of a shifting balance of economic power as emerging markets, such as China, India and Brazil, demanded greater influence over the international financial system.
In addition to pledging reform of the IMF and World Bank to reflect “changing economic weights in the world economy”, the communique also called for the immediate expansion of the Swiss-based Financial Stability Forum to a ”broader membership of emerging economies”.
During the meeting, Hu Jintao, the Chinese President, called for ”a new international financial order that is fair, just, inclusive and orderly”.
Manmohan Singh, India’s prime minister, said elite international bodies such as the Group of Seven were “no longer sufficient to meet the demands of the day”.
”We need to ensure that any new architecture we design is genuinely multilateral with adequate representation from countries reflecting changes in economic realties,” he said.