G-20 LEADERS SUMMIT: LATEST AUSTRALIAN VIEWS FROM

C O N F I D E N T I A L CANBERRA 001097


NOFORN

NSC FOR PRICE AND BROWN
DEPARTMENT FOR U/S JEFFERY, EEB DAVID NELSON, EAP, EAP/ANP
AND EAP/EP
TREASURY FOR U/S MCCORMICK AND CHRIS WINSHIP

E.O. 12958: DECL: 10/30/2018
TAGS: EFIN ECON PREL AS
SUBJECT: G-20 LEADERS SUMMIT: LATEST AUSTRALIAN VIEWS FROM
NEWLY APPOINTED SPECIAL ENVOY

REF: A. CANBERRA 1096

B. CANBERRA 1076

Classified By: Economic Counselor Edgard Kagan for reasons 1.4 (b/d).

Summary
--------------


1. (C/NF) Australian thinking about the goals for the
upcoming G-20 leaders summit has evolved, according to
newly-appointed Prime Minister's Special Envoy for the
International Economy Mike Callaghan. Callaghan was about to
leave later in the day for China, the UK and the United
States. Sharing the latest draft of Australia's goals paper
for the Summit, Callaghan said Australia now believes that
the Summit should create three vice two working groups, with
the third group addressing efforts to stimulate growth (the
first would address short-term stabilization of financial
markets and the second would look at longer term reforms).
The goal of the financial stabilization and economic growth
working groups would be to do real-time coordination between
countries to minimize the risk of unintended consequences
resulting from actions by different countries. It will also
be important to get countries to think through how they will
wind down their interventions in financial markets and to
coordinate these efforts . "The last thing we want are new
institutions," said Callaghan, stressing that the goal of the
Summit should be to make sure that existing systems work.
Noting high expectations for the Summit in Australia and
around the world, Callaghan stressed the importance of
concrete results. The draft we were given suggested that the
long-term reform working group could be chaired by the UK and
Australia. Following the discussion, Callaghan sent us a new
version suggesting the working group be chaired by the UK,
Korea and "perhaps a third country." Callaghan commented
that Australia has been hearing about the possibility of a
follow-up G-20 Leaders Summit being held by mid-January. He
said Australia supports aggressive efforts to make progress
on stabilizing financial markets but wonders if this might be
an unrealistically early date. End Summary.

New Special Envoy
--------------


2. (C/NF) Prime Minister Kevin Rudd has appointed Mike
Callaghan as his Special Envoy on the International Economy.
A long-time Treasury official who served as IMF Executive
Director representing Australia and 13 other countries from
2002-2004, Callaghan was most recently a Deputy Secretary at
the Department of Environment, Water, Heritage and the Arts
after having served as a Deputy Secretary for the Revenue
Group at the Treasury. Callaghan served as Chief of Staff to
former Treasurer Peter Costello from 1999-2000 and was the
Qformer Treasurer Peter Costello from 1999-2000 and was the
senior Treasury representative involved with the reform of
Australia's financial regulatory structures in the
late-1990s. Callaghan played an active role in Australia's
chairing of the G-20 in 2006.

Upcoming Travel to China, UK and United States
-------------- -


3. (C/NF) Callaghan said Australia wants to support U.S.
efforts to address the global financial crisis during an
October 30 meeting with Econcouns to preview his upcoming
travel to China, the UK and the United States. Callaghan was
planning to leave later October 30 for Beijing. He does not
know what to expect in Beijing but believes China is
increasingly concerned about Asian financial market
stability. Callaghan is looking forward to his Washington
meetings and understands that meetings have been set up with
Deputy National Security Advisor Price, Treasury Under
Secretary McCormick and Under Secretary Jeffery.

Further on Aussie Thinking
--------------


4. (C/NF) Australia has further refined its thinking on the
Summit. Callaghan provided a new version of the internal
working draft of Australia's goals paper for the Summit
(original version reported Canberra 1096),which he said
largely fleshed out the earlier ideas. The one major change
is that Australia now would like to see creation of three
vice two working groups. Arguing the importance of
coordinating the efforts to stimulate economic growth that
are taking place in every G-20 country, Callaghan said it is
unrealistic to expect one working group to do this and
address financial market stabilization. Australia now
believes that the working group on financial market
stabilization should be jointly chaired by the United States
and Brazil. This would highlight the role of developing
countries and give them "buy in" to the process, according to
Callaghan. It would also push back against the notion that
financial market turmoil is a problem of developed and not
developing countries. The role of this working group should
be to facilitate coordination of government actions to
stabilize financial markets as well as the unwinding of these
steps once markets have stabilized.


5. (C/NF) The working group on stimulating economic growth
could be chaired by Germany and China, Callaghan suggested.
Germany will be very important to generating growth within
the Eurozone, while China will be viewed as the logical
leader amongst developing countries, he said. Noting that
France will push hard for a leading role, Callaghan said
Australia sees Germany as far preferable and will support
opposition to the French.


6. (C/NF) Callaghan said that Australian thinking about the
working group on longer term reform had also evolved.
Canberra still sees this group as trying to improve existing
systems rather than create new structures. However, the
Aussies now believe that they should be the co-chairs, along
with the UK, of this group. Econcouns pointed out that this
Qwith the UK, of this group. Econcouns pointed out that this
undermines the original argument that the UK and Korea should
co-chair such a working group in their capacities as the
current and incoming chairs of the G-20. Econcouns also
noted unhappiness with recent Australian actions involving
the summit and suggested that pushing a leading Aussie role
might not go over well. Callaghan took the point and
followed up an hour after the meeting with a new draft
referring to the UK, Korea and "perhaps another country"
serving as co-chairs. Callaghan also said that Australia
will probably be ready to provide resources to support this
working group in the form of staff as well possible support
for participation by other countries.

No New Institutions, but Better Coordination
--------------


7. (C/NF) Stressing that Australia does not want new
institutions, Callaghan said that recent events have
highlighted for Canberra the importance of coordinating
international moves. Noting the continuing brouhaha over
various investment funds freezing withdrawals from over A$25
billion ($15 billion) worth of funds (reftel B),Callaghan
said this was the unintended consequence of the Government's
decision to guarantee all banking deposits. That decision
led investors in mortgage funds and other investment vehicles
to try to move their money to banks that were covered by the
guarantee, which in turn forced the funds to freeze
withdrawals. The decision to offer the unlimited guarantees
was not driven by problems in Australia's banks, as the four
major banks that control 80% of the market are all among the
world's 12 remaining AAA-rated institutions. According to
Callaghan, the decision was driven by the need to ensure that
the Australian banks remained competitive with banks in other
OECD countries that were being covered by deposit guarantees.
Better international coordination might have given more time
for Australia to come up with a better policy approach. The
same will almost certainly be true as such measures are
unwound, Callaghan said.

Followup Summit?
--------------


8. (C/NF) Callaghan commented that Australia has been hearing
about the possibility of a follow-up G-20 Leaders Summit
being held by mid-January. He said Australia supports
aggressive efforts to make progress on stabilizing financial
markets but wonders if this might be an unrealistically early
date.

Latest Australian Draft
--------------


9. (C/NF) Australian Internal Working Draft of G-20 Leaders
Summit Goals Paper. Begin Text:

G-20 Leaders Summit

The summit should provide a high-level strategic assessment
of the way forward, as well as providing the political
impetus for advancing the necessary changes. The objectives
for the Leaders Summit could be investigated around three
broad timeframes.

(i) Immediate considerations

- stabilization of financial markets;
- bedding down measures to restore market
confidence;
- impact on emerging markets and developed
economics, including, adequacy of financing and support
arrangements; and
- coordinated efforts to stimulate economic growth.


(ii) Transition issues

- coordinated and orderly withdrawal of the
measures taken to restore confidence in financial markets; and
- renewed actions to prevent the build up of
protectionism.

(iii) Longer-term objectives

- identifying and implementing the measures needed
to strengthen financial and economic markets and reduce
the likelihood of future crisis.

In light of the fact that many countries are working quickly
to bed down regulatory changes within their respective
national economics, there are likely to be practical
difficulties if leaders were to try to establish too many
working groups simultaneously.

To overcome this obstacle, leaders could commission three
working groups.

- The more immediate and pressing issues would be
undertaken by a working group (possibly to be chaired by
the US and Brazil) that would work informally and report
frequently to coordinate real-time advice back to
all G-20 members to ensure that:

- confidence is restored and maintained such that banks
and financial institutions continue to lend to households
and businesses.

- all available tools are being deployed to support
systemically important financial institutions;

- international cooperation in the implementation of the
measures introduced to restore market confidence, such as
deposit insurance, guarantee arrangements and government
capital injections into financial institutions, and there is
ongoing close global coordination when such measures are
unwound;

- G 20 members are leading by example in implementing the
FSF recommendations for strengthening financial systems;

- effective and efficient arrangements are in place,
particularly through the International Financial
Institutions, to meet the financing and adjustment
requirements of emerging markets impacted by the crisis.
This would include monitoring the responsiveness of the
IFI,s as well as the adequacy of their resource base.

A second working group (possibly chaired by China and
Germany) would focus on ensuring that all available measures
are being taken to minimize the impact of the financial
crisis on activity and that economic growth is restored.

Looking further ahead, a third working group (perhaps chaired
by the UK, Korea and perhaps another country, and drawing on
secondments from G-20 members) would begin work on the
longer-term objective of developing an action plan to
strengthen the regulatory structure for financial markets and
institutions in an increasingly integrated global economy.
The objective of this working group would be to provide the
impetus for the establishment of globally accepted standards
of supervision and regulation of financial markets and
institutions which would be applied equally and consistently
by all countries. In undertaking this task the working group
would consider:

- ensuring that systemically important financial
institutions are appropriately regulated with full
disclosure of balance sheet and off-balance sheet exposures,
recognizing that systemically important institutions can vary
over time and between countries

- assessing whether the regulation and supervision of
financial institutions should be based more on the type of
financial activity being undertaken and less on the type of
intermediary

- establishing supervisory systems that are not
pro-cyclical, including strengthening banks capital positions
in the good times as a buffer for the bad times, implementing
sound loan-loss provisioning, and developing accounting rules
to evaluate risk that take a more medium-term perspective and
do not encourage institutions to think that risk is low just
because asset prices are high, or recent asset price
volatility has been low

- ensuring financial institutions have clear internal
incentives to promote financial stability, including through
regulators setting higher capital requirements for banks with
executive compensation arrangements which reward short-term
returns or excessive risk taking.

- establishing regulatory frameworks such that central
banks have the overall responsibility for the stability of
the financial system and that they have the capability to
perform this role

- developing effective early warning systems that better
understand the interaction between macro-financial and
systemic risks and ensuring that there are mechanisms to
respond to identified risks

- introducing mechanisms for more effective cross-border
supervision of global firms and better mechanisms for
cooperation in a crisis

- enhanced cooperation between international standards
setters, like the FSF, and the International Financial
Institutions, particularly the IMF and World Bank.

An interim report on reform priorities could be presented to
a special G-20 finance ministers meeting ahead of the
IMF/World Bank meetings in April, with a final report
presented to leaders in the second half of 2009.

End Text.

McCallum