If that happens, affected financial institutions would spin off their troubled assets into a separate "bad bank," which would be partially owned by the government. In exchange for these shares, the healthy portions of the institutions would receive non-negotiable government bonds. Equipped with such solid assets, the banks could devote themselves to their actual business once again: lending their customers money. The spun-off toxic securities would be liquidated over a period of 15 to 20 years. The healthy banks would reimburse the government for any losses it incurred as a result.
The captains of the economic Titanic will not discuss the details of this set of issues at their London meeting. As a result, the agenda of the upcoming financial summit seems oddly unfocused.
The world leaders plan to talk about all kinds of things in London, from economic stimulus programs to the balance sheets of hedge funds, and from banking supervision to executive compensation. But they will only address the most important program as a secondary issue: A truly comprehensive, lasting and future-oriented cleanup of the infirm financial sector. In this respect, the group of officials set to attend the summit can already be likened to a fire truck pointing its hose at a collection of houses, just not at the one currently in flames.
There is another crisis issue to which the club of industrialized countries will devote only marginal attention: the devastating economic downturn in the developing world.
Only a few months ago, leaders in Asia, Africa and Latin America insisted that the crisis would not affect their countries. What did they have to do with derivatives, Wall Street and speculative transactions? In fact, they were celebrating growth rates of up to 6 percent and were convinced that their financial systems were immune, because their banks are hardly connected to the global financial market.
It is clear today that nowhere will the effects of the global crisis be more brutal than in the world's poorest countries. The scope of the economic downturn in the developing world is becoming more dramatic from one month to the next.
Africa's stock markets have fallen by an average of 40 percent. Ghana and Kenya have delayed the issue of government bonds worth more than $800 million (€590 million), thereby postponing the construction of important roads and natural gas pipelines.
In its report on preparations for the G-20 summit, the World Bank predicts that the global economy and world trade will shrink for the first time in 60 years, and that the weakest countries will be the hardest hit. In the next two years alone, the developing world could face a financing gap of $270 billion (€200 billion), which could grow to up to $700 billion (€520 billion).
In addition, much of the financing for major projects is vanishing into thin air because capital is either no longer flowing or is being pulled out. In Senegal, a $2 billion (€1.48 billion) iron ore mining project in the Falémé region has been delayed because the government's partner, steel giant ArcelorMittal, is in financial difficulty due to a drastic decline in the price of iron ore since the contract was signed.
Indeed, most developing countries are no longer in a position to help themselves and find a way out of the crisis. According to World Bank President Robert Zoellick, only one in four countries has the necessary economic strength for stimulus programs.