The International Monetary Fund’s One-Two Punch to the Financial Sector’s Guts
by Martin Denholm, Senior Editor, Investment U
Friday, April 23, 2010
Who says those G20 summits are a waste of time?
Okay, so it’s a lot of unnecessary fuss and security expenditure when the leaders of the world’s 20 most powerful nations could just get Cisco on the line and have a video conference.
But at the meeting in London last year, they did manage to agree on one thing: That financial institutions should bail out their own mess, instead of getting taxpayers to do it for them.
Three cheers for the G20.
Or perhaps this should have been the case all along.
But it was never going to happen without a coordinated global effort to deal with something that is a global problem. The International Monetary Fund (IMF) has now made that happen, with the introduction of a new paper – “A Fair and Substantial Contribution by the Financial Sector.”
Financial Sector Reform… The IMF Way
By IMF standards, it’s pretty hard-hitting. It basically lays out the guidelines for banks to pay “the fiscal cost of any future government support to the sector.” It includes two main proposals…
- A “Financial Stability Contribution”: This is a flat fee paid by all financial institutions, with those with greater risk contribute more. It encompasses all institutions (for example, insurers, hedge funds) in order to ward off the potential for big banks to reclassify their businesses and strategy, thereby dodging the fee.
- A “Financial Activities Tax”: This is the point that has banks riled up the most, as it would impose a fee on banks’ profits and a tax on pay to employees.
While several countries have proposed banking sector reforms, there are no direct taxes imposed on financial institutions. It requires a worldwide effort, since today’s global economy means companies could shuffle their operations over to a country with looser regulations.
And speaking of the IMF and the global economy…
Cut Debt… But Add Stimulus
The combined world economy is expected to notch up a 4.2% growth rate this year, according to the IMF’s latest World Economic Outlook.
And now that it’s proposed brand-spanking-new taxes on banks, so that they can dig themselves out of their own trouble, it frees up more room for governments to pump more stimulus into their economies.
Yet at the same time, the IMF warns that spending and national debt levels must be addressed. Hmm… I think that’s what’s called trying to straddle both sides of the fence.
The group also said that with interest rates in several nations already at rock-bottom, it’s a “key concern” that countries’ options have either “been exhausted or become much more limited.”
Hence the appeal for a reduction in spending and next year for countries in a healthy enough financial position to do so.
That obviously doesn’t include you, Greece…
Best regards,
Martin Denholm
Related Investment U Articles:
- The Busan Ultimatum
- S&P Sounds the Alarm on U.S. Treasury Debt
- Sweden: The European Country You Should Be Investing In
- How Greek Default Could Double-Dip U.S. Economic Recession
- Is the Global Economy Heading for Another “Lost Decade?”
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