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G-30 warns of fund crisis in major economies
Publication Date : 12-02-2013
Major economies need to invest on long-term funds for housing, education, infrastructure or economic growth could fall short of forecasts
The world's major economies may face a shortage of long-term funds to pay for essential investments in, for example, housing, education and infrastructure unless significant financial system reforms are made.
Without sufficient capital for these investments, global economic growth could fall short of "even moderate" forecasts, said Jean-Claude Trichet, chairman of the Group of 30 (G-30).
richet, a former European Central Bank president, issued the warning yesterday in London during the launch of a report produced by a G-30 working group.
The G-30 is an international body of economic and financial leaders, including Singapore Deputy Prime Minister Tharman Shanmugaratnam.
Its report identified three key trends that could constrain the supply of long-term finance: banks tightening lending; governments cutting back on spending; and ageing populations that are shifting older investors towards lower-risk assets.
Major reforms are needed to attract more long-term funds from governments, private institutions and individual investors, the report said.
Some of the more innovative reforms suggested include creating new savings instruments that can be channelled into long-term investments and setting up dedicated long-term financing institutions.
"Action is needed because the prospects for efficiently securing adequate long-term finance have been reduced by turbulent economic conditions that we have confronted in recent years," said Trichet.
While there is no lack of liquidity in global markets, these must be effectively channelled to meet long-term investment needs, said Tharman, who was part of the steering committee that led the G-30 working group.
He was not present at the London press conference but provided his remarks in a press release.
"There is an abundance of liquid savings still on the sidelines, including pension funds looking for much-needed yields; and there is at the same time no lack of global need for real-sector investments to spur economic growth," Tharman said.
"What is critically needed therefore are stronger bridges between global savings and long-term investment."
Tharman, who is also Singapore's Finance Minister, added that the G-30 recognises the risks of capital flows that are short-term and volatile in nature.
Policymakers in emerging economies dealing with such risks should use "appropriate macroprudential policy tools" to avoid asset bubbles, but continue to gradually ease controls on cross-border capital flows, he said.
Nine economies that make up 60 per cent of the world's economic output drew US$11.7 trillion of long-term investment in 2010, said the G-30 report. By 2020, they could require US$18.8 trillion annually, it added, drawing on research by McKinsey Global Institute.
The nine countries are the United States, Britain, Germany, France, Japan, China, India, Brazil and Mexico. China alone will account for roughly half of the increase in long-term capital needs.
"If the appropriate steps are not taken, we face a potential demand and supply mismatch that could adversely impact global economic growth," said Dr Guillermo Ortiz, chairman of the G-30 working group authoring the report and Mexico's former finance minister.