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DEPT OF TREASURY WASHINGTON DC

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