Proposals of the G20 Finance Ministers’ meeting - temporary solutions to avoid default

The G20 official website provides only the calendar of the G20 meetings and therefore leaving the rest of the public only with expectations regarding the agenda. Moreover, reports about discussed issues and reviews of official statements are also primarily released by public media. However, the main idea of this article is not to criticize the publicly available information. The most important is the objectives of the meetings and the content of proposals discussed.

According to the public media, the G20 Finance Ministers mainly discussed the Europe’s plan to handle sovereign debts and banks stability in the meeting held on the 14th-15th of October in Paris. The solution for European banks to write down Greek debt was discussed alongside with the proposals to support capitalization of the banks those need to be protected against banks' exposures to other bad European countries sovereign debts. It was proposed to enhance the European Financial Stability Facility and leverage the fund for the insurance purposes to protect investors against European debt losses. The considerations regarding the write down of Greek debt ranged from a 21% to 50% were taken and additional options such as exchange of Greek bonds for new debt at a lower face value collateralized by the euro area’s AAA-rated rescue fund, or to set up an European-level backstop capitalized by the rescue fund were discussed. According to the final option the established entity would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities. The IMF officials estimated that additional €100 billion to €200 billion in extra capital is needed to recapitalize banks.

Equilibrium is required to sustain well functioning systems. However, the transfer of possible default from sovereigns to banks and the transfer of banks losses to the European level backstop entity is just a temporary solution to avoid the announcement of the default until clear proposals to boost competitiveness of the region by improved conditions for the capital inflows through stimulation of investment in new technologies and optimization of processes are not accepted.