Although no concrete stimulus measures were drawn up at the emergency G20 meeting in Washington this past weekend, world leaders agreed they must work together to plug the holes in current financial regulatory systems that are the root of the current economic meltdown.

The statement released following the meeting said more transparency and accountability is needed in financial markets.

Specifically, G20 leaders decided policy must be improved to allow for more oversight in derivative markets and the analysis of "complex, illiquid products." They also agreed on the neccesity to align global accounting standards, and to review compensation schemes in companies that reward risk-taking.

A timeline must be put in place by finance ministers, they said, to complete these "high priority" initiatives by March 31, 2009.

Julian Jessop, economist with Capital Economics said although some market watchers may be disappointed with the lack of concrete initiatives, "the real purpose of this summit was to agree a work programme for reform of the global financial system. In that respect we would suggest that it has been a success."

The G20 said a list of corporations that are "systemically important" should be drawn up, and those institutions should be subsequently reviewed to ensure they are properly regulated and monitored. Furthermore, they said, ratings agencies should be registered and more carefully watched.

The statement also emphasized the need to ensure institutions like the International Monetary Fund (IMF) and the World Bank are properly capitalized to "continue playing their role in overcoming the crisis," and called on international financial organizations to take a leading role in directing the coming adjustments.

The IMF has already delivered emergency loans amounting to more than $30 billion to Iceland, Hungary and Ukraine.

Japan, for its part, pledged last week to lend $100 billion to the IMF, and Japanese Prime Minister Taro Aso urged other nations to do the same.

As for central bank action, the G20 members said they "recognize the importance of monetary policy support, as deemed appropriate to domestic conditions."

"In other words, lower central bank rates are an important tool, but each country is free to go its own way," said Eric Lascelles, chief strategist with TD Securities. To be clear, he said, this is not an implication of another globally coordinated rate cut on its way.

As for market reaction, Lascelles said fixed income market response to the statement could be mixed. "This makes for a rather difficult proposition as a lack of formal commitment to coordinated cutting could push yields higher, but the slight overall disappointment should have the opposite effect," he said.

In currency markets, disappointment is already evident, said economists at RBC Capital Markets. They said the U.S. dollar is doing well while the Australian dollar and New Zealand dollar are down, telltale signs of risk aversion.

Going forward, another G20 meeting will take place by April 30, 2009 to review how the policy initiatives drawn up in Washington over the weekend are coming along.

By Megan Ainscow
©CEP News Ltd. 2008