Today the market has been up and sideways basically, perhaps a little more defensive this afternoon,...
Don't expect the bond markets to cheer the G20 results
06/28/2010 10:11 am EST
Certainly the meaningless promise that the leaders of the world’s 20 largest economies cobbled together after this weekend’s meeting of the G20 isn’t going to increase anyone’s confidence in the direction of the global economy.
Finally the differences between the United States, which remains worried about the health of the global economic recovery, and the European Union, which is trying to restore global confidence in the euro, were just too wide to bridge.
The best world leaders could come up with was an agreement that the G20 expected that governments would cut their budget deficits in half by 2013 and stabilize their debt to GDP ratios by 2016.
Couple of important points about that agreement.
First, it was phrased as an “expectation” rather than a goal or a promise. That leaves even more wiggle room than usual about actually achieving these numbers.
Second, by pushing out the deadlines to 2013 and 2016, the leaders of the G20 countries will have plenty of time to see what’s working and adjust course. By 2011 or 2012 the G20 will know if the global recovery is as fragile as the United States worries it is—and have plenty of time to modify its targets. Setting a goal for debt to GDP ratios way off in 2016 gives governments plenty of political cover too. Changes to retirement ages or cuts to government work forces can be staged in so that voters won’t feel the pain now and will have less anger to express at the ballot box.
But I don’t see anything in this agreement that will convince the bond markets in the near term that governments are serious about reducing their deficits. And if the bond markets start to think that this is the best that the world’s governments can do, the agreement could actually undermine the little confidence that markets still have.
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