LONDON (Reuters) - World leaders clinched a $1.1 trillion deal on Thursday to combat the worst economic crisis since the Great Depression and said financial rules would be tightened to stop it happening again.
U.S. President Barack Obama declared it a “turning point” for the world economy, even though he had won no promises for more government spending to combat a deepening world recession.
French President Nicolas Sarkozy celebrated the waning of the Anglo-Saxon model of lightly regulated capitalism, which many blame for excess that have triggered the crisis.
World stocks rallied on bold action that will help finance emerging markets, though economists cautioned against euphoria.
“We have agreed on a series of unprecedented steps to restore growth and prevent a crisis like this from happening again,” Obama told a news conference.
“We’ve also rejected the protectionism that could deepen this crisis.”
G20 leaders from the largest developed and emerging economies ticked off a raft of actions on politically sensitive topics — — new rules on bonuses, publishing a blacklist of tax havens that could lead to sanctions, imposing oversight on large hedge funds and on credit rating agencies. The tax havens marked a victory for France and Germany.
Australian Prime Minister Kevin Rudd hailed the actions. “Today’s agreement begins to crack down on the cowboys in financial markets that have brought global markets undone.”
Markets, desperate for good news when the global economy is shrinking for the first time since World War Two, reacted positively to imposing headline of $1.1 trillion that boosts financing through the International Monetary Fund and for trade. Much will be directed to emerging markets increasingly sucked into the global economic turmoil. Its size was unexpected.
In addition British Prime Minister Gordon Brown, the summit host, said governments already have pledged $5 trillion of public stimulus by the end of next year, even before taking into account their commitments to do whatever may be needed that came from the London summit.
But missing from the deal were specifics on the financial rules, how banks would unload their toxic assets, let alone any clarity on the actual size of stimulus already in the pipeline. Brown did not say how the $5 trillion squared with an estimate he gave just a day earlier of about half that amount. Indeed, Obama spoke of around $2 trillion rather than five.
By day’s end the index of top European shares was up 4.9 percent. On Wall Street, the Standard and Poor’s index was up 3.73 percent.
The new funds available through International Monetary Fund and other institutions included $250 billion of IMF reserve units called Special Drawing Rights. In addition, the IMF would see its own resources tripled, with up to $500 billion of new funds, of which $40 billion would come from China — a significant step for the world’s third largest economy.
Much of that is likely to go to struggling poorer countries, notably in eastern Europe.
“It is going to be a help to poorer countries that have been hit by the sharp decline in trade flows, said Sarah Hewin, senior economist at Standard Chartered in London.
The summit also agreed a trade finance package worth $250 billion over two years to support global trade flows, which are forecast to fall 9 percent this year under the impact of the credit crunch — a boost to the world’s major exporters.
“That should be good for the big exporters such as China and other emerging economies including Brazil. It should please the Germans as well,” said Jim Rollo, European Economics Professor at Sussex University.
Some economists said the new IMF funds masked the lack of agreement on further fiscal stimulus at national levels, something the United States, UK and Japan wanted but France and Germany strongly resisted.
Brown conceded that there were “no quick fixes” but said the decisions would shorten the recession and save jobs.
The G20 said in a communique the measures taken would raise world output by four percent by the end of next year.
“I think the steps in the communique were necessary. Whether they are sufficient we’ve got to wait and see,” Obama said.
French President Nicolas Sarkozy said the results were beyond what could have been imagined. Germany’s finance minister welcomed the fact that no obligation was agreed for countries to adopt further stimulus packages. The issue had created tension in the summit build-up, with Washington favoring such packages and Paris and Berlin preferring to let earlier measures take their course.
Addressing a key demand from France and Germany, Brown said the leaders agreed “there will be an end to tax havens that do not transfer information on request. The banking secrecy of the past must come to an end.”
Costa Rica, Malaysia, the Philippines and Uruguay have been placed on the blacklist of non-cooperative tax havens, according to a copy of the document obtained by Reuters.
The tax haven issue had threatened to be a stumbling block to agreement, with France and Germany demanding a crackdown on jurisdictions whose bank secrecy laws they portrayed as enabling the rich to dodge taxes at a time of economic hardship.
“Since Bretton Woods, the world has been living on a financial model, the Anglo-Saxon model — it’s not my place to criticize it, it has its advantages — clearly, today, a page has been turned,” France’s Sarkozy said, referring to the landmark conference that created the post-war economic order.
Writing by Brian Love, editing by Mark Trevelyan and Janet McBride