G20 plans for stimulus exit

By Ralph Atkins in Frankfurt and Norma Cohen in London

World leaders have set out the first steps toward withdrawing emergency support for the global economy even though they warned that the crisis was not over. On the eve of Friday’s meeting of G20 finance ministers to prepare for a summit on financial regulation later this month, the US, UK, France and Germany called for work to start “on exit strategies to be implemented in a co-ordinated manner as soon as the crisis is over”.

Tim Geithner, US Treasury secretary, said finance ministers should start to spell out how the “very successful policy response” to the economic crisis could be reversed. Speaking at the US Treasury before flying to London to meet his counterparts from the Group of 20 nations, Mr Geithner said these exit strategies were “very important to [the] confidence” of the financial markets. The London meeting will be followed by a summit in Pittsburgh, hosted by President Barack Obama, on September 24-25.

Discussed content

● Bankers’ bonuses
● Bank capital adequacy and liquidity
● Accounting for bank assets and liabilities
● Exiting from massive fiscal and monetary stimulus
● Completion of the international aid package
● Reform of international financial institutions

Jean-Claude Trichet, European Central Bank president, writing in Friday’s Financial Times, has outlined for the first time the principles the ECB would use to unwind the exceptional steps it has taken.

The calls highlight how the policy debate has switched from crisis response to presaging a return to normal conditions.

A recovery in the world’s economy now looks likely to come earlier than had been expected a few months ago, the Organisation for Economic Co-operation and Development said on Thursday. But it warned that a return to normal conditions would be slow and protracted.

The OECD is forecasting that in 2009, the contraction in output among G7 nations will be 3.7 per cent, less severe than the 4.1 per cent decline forecast just a few months ago. The OECD downgraded the outlook for the UK, which will be the only G7 nation not to show growth in any single quarter of 2009.

For 2009, UK gross domestic product is expected to contract at an annualised 4.7 per cent, an even sharper fall in output than the 4.3 per cent decline forecast in June, although the third and fourth quarter outlooks have been revised up marginally.

The UK’s recovery was slower than the global recovery partly because of its heavy specialisation in financial services, said Jorgen Elmeskov, acting head of the OECD’s economics department. The global recovery was being led by the manufacturing sector.

Mr Elmeskov said the UK’s ability to stimulate demand had been constrained compared with other countries.

Mr Trichet, in his FT article, stressed that it was “premature to declare the financial crisis over”. The ECB sees a bumpy road ahead for the eurozone and is wary about global prospects, especially if the US rebound disappoints. The ECB left its main interest rate unchanged at 1 per cent on Thursday.

In a joint letter to European Union countries, Gordon Brown, prime minister, Nicolas Sarkozy, French president, and Angela Merkel, German chancellor, wrote: “While cyclical indicators point to economic stabilisation, the crisis is not over.”

Treasury Highlights Recovery Act Impact

Report Details Cumulative, State-by-State Data on Treasury's Recovery Act Programs, Including $66.1 Billion in Tax Benefits to Date for Individuals, Families, Businesses

WASHINGTON – As part of an effort to highlight the success of the American Recovery and Reinvestment Act (Recovery Act) in revitalizing communities across the country, the U.S. Department of the Treasury today released a report providing state-by-state data on Treasury program funding. The report, issued around the 200 day anniversary of the Recovery Act, details funds provided to states, local communities, and families through a variety of programs, including the Making Work Pay Tax Credit, payments for renewable energy production, funds for affordable housing development, and Build America Bonds.

"In 200 days, the Recovery Act has made significant progress in revitalizing our communities and providing the basis for economic growth," said Treasury Deputy Secretary Neal Wolin. "Through innovative programs established by the Recovery Act, the Treasury Department has provided tax relief to millions of families, supported increased development of affordable housing and clean energy projects, and provided new tools for states and communities to fund much needed infrastructure projects."

Highlights of the impact from Treasury's Recovery Act programs during the first 200 days include:

· $66.1 billion in estimated tax benefits provided to individuals, families, and businesses through the implementation of various tax provisions. The Making Work Pay credit has been a significant element of these provisions.

· $502 million in payments made to promote renewable energy production throughout the country

· $2.3 billion provided to 37 states to spur the development of affordable housing

· $28.2 billion in Build America Bonds issuances to help 37 states finance a variety of public improvement projects

The report also provides information on the First Time Homebuyer's Tax Credit, the $250 one- time stimulus payments, New Markets Tax Credits, Qualified School Construction Bonds, and Recovery Zone Bonds. The comprehensive report is available here. Additional information on Treasury's Recovery Act programs follows:

Making Work Pay Tax Credit: In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act provides a credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. The tax credit is calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

Recovery Zone Bonds: Recovery Zone Economic Development Bonds are one type of taxable Build America Bond that allow state and local governments to obtain lower borrowing costs through a new direct federal payment subsidy, for 45 percent of the interest, to finance a broad range of qualified economic development projects, such as job training and educational programs. Recovery Zone Facility Bonds are a type of traditional tax-exempt private activity bond that may be used by private businesses in designated recovery zones to finance a broad range of depreciable capital projects. Both of these are allocated directly to counties and large municipalities

Qualified School Construction Bonds: Investors who buy these bonds receive tax credits worth 100 percent of the interest, allowing state and local governments to obtain financing without having to pay any interest. States may directly issue the bonds on behalf of eligible schools or provide school districts with the authority to issue the bonds within the state.

Qualified Energy Conservation Bonds: These bonds are authorized under an expanded tax credit bond program of the Recovery Act of 2009 for states and large local governments based on population data. The bonds are tax credit bonds that provide a federal subsidy for repair and rehabilitation of public schools and related authorized purposes through a federal tax credit to investors intended to cover 70 percent of the interest on the bonds.

Build America Bonds: Under the Build America Bonds program, Treasury makes a direct payment to the state or local governmental issuer in an amount equal to 35 percent of the interest payment on the Build America Bonds. Potential investors include pension funds that traditionally do not hold tax exempt bonds and foreign investors. These investors have been important additions to the market for municipal debt.

One-time $250 Payments: Treasury's Financial Management Service, in coordination with the Social Security Administration, the Railroad Retirement Board, and the Department of Veterans Affairs, have issued more than 54 million Economic Recovery payments to beneficiaries totaling more than $13 billion.

Community Development Financial Institutions: The CDFI Fund makes monetary awards (grants, loans and other investments) on a competitive basis to certified CDFIs. A CDFI is a specialized financial institution that works in low-income communities or serves individuals or businesses that lack access to mainstream financial institutions. Among many financial services, CDFIs provide capital to small businesses and micro-enterprises; mortgage loans to first-time homebuyers; financing to support the development of affordable housing projects and community facilities; and retail banking services to the unbanked.

New Markets Tax Credit: With the increased investment authority made available through the Recovery Act, this program incentivizes private-sector capital investment in distressed communities across the country to create jobs, stimulate economic growth, and jumpstart the lending necessary for financial stability. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period.

Affordable Housing Payments: Under this program, state housing agencies that apply receive funds to finance the construction or refurbishment of qualified affordable housing developments. Applicants agree to forgo tax credits down the line in favor of an immediate payment. Through this program, the Treasury Department works with state housing agencies to jump start the development or renovation of qualified affordable housing across the country.

Renewable Energy Payments: The Recovery Act authorized Treasury to make direct payments to companies that create and place in service renewable energy facilities. Previously, these companies could file for a tax credit to cover a portion of the renewable energy project's cost. Under the new program, applicants would agree to forgo tax credits down the line in favor of an immediate payment.

First Time Homebuyer's Tax Credit: Taxpayers who qualify for the first-time homebuyer credit and purchase a home this year before December 1 have a special option available for claiming the tax credit either on their 2008 tax returns or on their 2009 tax returns next year. The maximum credit is $8,000.

Stronger Capital and Liquidity Standards for Banking Firms

To read the Treasury Department's policy statement, "Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms," please visit link

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The global regulatory framework failed to prevent the build-up of risk in the financial system in the years leading up to the recent crisis. Major financial institutions around the world had reserves and capital buffers that were too low; used excessive amounts of leverage to finance their operations; and relied too much on unstable, short-term funding sources. The resulting distress, failures, and government bailouts of these firms imposed unacceptable costs on individuals and businesses around the world. Going forward, global banking firms must be made subject to stronger regulatory capital and liquidity standards that are as uniform as possible across countries. Today the Treasury Department set forth the core principles that should guide reform of the international regulatory capital and liquidity framework to better protect the safety and soundness of individual banking firms and the stability of the global financial system and economy.

Stronger capital and liquidity standards for banking firms:

· Capital requirements should be designed to protect the stability of the financial system, not just the solvency of individual banking firms, including banks, bank holding companies, financial holding companies and large, interconnected firms.

· Capital requirements for all banking firms should be increased, and capital requirements for financial firms that could pose a threat to overall financial stability should be higher than those for other banking firms.

· The regulatory capital framework should put greater emphasis on higher quality forms of capital that enable banking firms to absorb losses and continue operating as going concerns.

· The rules used to measure risks embedded in banks' portfolios and the capital required to protect against them must be improved. Risk-based capital requirements should be a function of the relative risk, including systemic risk, of a banking firm's exposures, and risk-based capital rules should better reflect a banking firm's current financial condition.

· The procyclicality of the regulatory capital and accounting regimes should be reduced and consideration should be given to introducing countercyclical elements into the regulatory capital regime.

· Banking firms should be subject to a simple, non-risk-based leverage constraint.

· Banking firms should be subject to a conservative, explicit liquidity standard.

· Stricter capital and liquidity requirements for the banking system should not be allowed to result in the re-emergence of an under-regulated non-bank financial sector that poses a threat to financial stability.

· A comprehensive agreement on new international capital and liquidity standards should be reached by December 31, 2010 and should be implemented in national jurisdictions by December 31, 2012.