British Prime Minister Gordon Brown joined his German and French counterparts on Thursday in calling for G20 leaders to impose tough global rules on bank bonuses, after holding out for days to weaken plans for caps on individual payments.
French sources said the prime minister delayed joining the Franco-German plan for three days this week until a proposal for an absolute cap on individual traders’ bonuses linked to company profits or revenue was watered down.
Brown sought the concessions before agreeing to sign a letter drafted by German Chancellor Angela Merkel and French President Nicolas Sarkozy, and eventually published yesterday. It had been due to be published with fanfare on Monday, according to French sources. Brown, determined to protect the interests of the City of London, insisted that the French plan for a bonus cap should only be examined, rather than endorsed, leaving a Labour prime minister taking a less radical stance than the two conservative European leaders.
Britain regards bonus caps linked to annual profits as impractical, but Brown’s office insists it is nevertheless backing unprecedented tough action in the face of evidence that banks are reverting to past excesses.
The letter, designed as a common EU negotiating position before the G20 summit in Pittsburgh this month, has been published ahead of a two-day meeting of G20 finance ministers in London yesterday. The meeting aimed to rebuild momentum before the summit amid fears that the political will to combat the recession and bankers’ excesses is ebbing away.
The letter proposes internationally binding rules that will tightly link City bonuses to performance and allow for a clawback if a firm subsequently underperforms. The rules, some already adopted by the Financial Services Authority, would be policed nationally, the letter proposes, but any large bank recognized as failing to apply the rules would face sanctions and might lose its mandate to trade.
The letter also proposes that risky speculation should be curtailed by increasing all banks’ capital requirements, something the G20 proposed in April, but on which there has been little subsequent progress. A deadline of March next year is proposed for the abolition of tax havens.
In the most contentious section, the leaders of the three largest European economies propose to “explore ways to limit total variable remuneration in a bank either to a proportion of total compensation or the banks’ revenues/profits.”
Sarkozy touted his diplomatic success in persuading Brown to sign up to the initiative. He said: “The letter that I am sending this afternoon about bonuses will have a little surprise in it. It will be signed by Mrs Merkel and myself; it will also be signed by Mr Gordon Brown. Even the English understand that we have to regulate, we have to limit and that there are unacceptable scandals.”
The letter claims Europe’s people are “deeply shocked at the revival of reprehensible practices,” despite taxpayers’ money having been mobilized to support the financial sector.
The UK treasury wants bonuses to be paid over five years with some of the money clawed back if there is a weakening in the bank’s subsequent performance. It also proposes that much of the bonus will come in non-cash payments such as stocks.
The G20 meeting this weekend will discuss when and how to coordinate an exit from the current round of fiscal stimulus. Germany, clearly emerging from recession and averse to inflation-inducing deficits, is pressing hardest for a swift international slowdown in public spending. But in a speech in Scotland, British finance minister Alistair Darling said that targeted public spending was still needed. He insisted worldwide recovery would occur next year, but said “the biggest risk lay in thinking the job’s done.”
Citing growth in equity markets, stabilization of the US housing market and growth in Asia, he said: “There are now visible signs that global confidence is returning. That is why I continue to believe that we will see growth in our economy resume around the turn of the year.”
But Britain has the backing of the Americans to argue that a premature end to government spending runs the risk of creating a double dip recession, a theme Brown will press in a speech tomorrow and on a visit to Berlin to see Merkel tomorrow.
Tim Geithner, the US treasury secretary, on the way to London on Thursday, insisted it was not yet time for governments to wind down their stimulus packages.
“You’re seeing the first signs of positive growth in this country and around the world. We’ve come a very long way but we have to be realistic, we’ve got a long way to go still,” he said.
George Osborne, Britain’s shadow chancellor, said the spending wind-down had to start immediately, arguing: “[The] British government is still in complete denial despite having the largest deficit of all.”
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