G-7 Says Global Growth May Weaken, Market Turmoil to
Persist
By John Fraher and Theophilos Argitis
Feb. 10 (Bloomberg) -- Group of Seven policy makers
said the U.S. economy may slow further, eroding global
growth, and officials forecast more financial-market
turmoil.
``Downside risks still persist, which include further
deterioration of the U.S. residential housing
markets'' and tighter credit conditions, G-7 finance
ministers and central bankers said in a statement in
Tokyo yesterday. U.S. Treasury Secretary Henry Paulson
said ``we should expect continued volatility'' in
markets as risk is repriced.
The G-7 is trying to limit the damage from a housing
slump that has pushed the U.S. to the brink of a
recession and may consign the world economy to its
worst year since 2003. While the statement didn't
propose specific measures, European Central Bank
President Jean-Claude Trichet said officials will do
what's necessary to counter a ``significant market
correction.''
``The problems are going right through all parts of
the financial markets and there's not much the G-7 can
do about this,'' said Gilles Moec, an economist at
Bank of America Corp. in London. ``There's a danger
that the downturn will become a self-fulfilling
prophecy.''
Some officials signaled they were willing to take
steps to promote growth. Bank of Canada Governor Mark
Carney, whose term began two week ago, signaled he
will lower interest rates. Luxembourg Prime Minister
Jean-Claude Juncker, who represents finance ministers
from the 15-nation euro region, said some European
countries may have room to cut taxes.
Stock Market Slump
More than $6.7 trillion has been wiped from world
stock markets since the beginning of the year amid
concern that the U.S. slowdown would spread and
financial institutions would report more losses.
The rout, which started in August when credit markets
seized up, forced central banks in December to move in
concert to inject cash into financial markets in the
biggest act of international cooperation since the
Sept. 11 terrorist attacks.
Risks remain ``that further shocks may lead to a
prolonged recurrence of the acute liquidity pressures
experienced last year,'' Bank of Italy Governor Mario
Draghi said. ``It is likely we face a prolonged
adjustment, which could be difficult.''
The Federal Reserve, the Bank of England and the Bank
of Canada have cut rates this year and the European
Central Bank signaled it may lower them.
``Going forward, we will continue to watch
developments closely and will continue to take
appropriate actions, individually and collectively, in
order to secure stability and growth,'' the G-7
statement said.
Risks to Growth
Risks to growth include tighter credit conditions and
heightened inflation expectations, the statement said.
Some economists say the ability of G-7 policy makers
to end the crisis is limited. The group consists of
the U.S., the U.K., Canada, Italy, France, Germany and
Japan.
``This is a credit market problem in the West which
has to play itself out,'' said Peter Spencer, adviser
to the Ernst & Young Item Club and a former U.K.
Treasury official. Aside from rate cuts and tax
reductions, ``I don't think there's a lot more that
can be done.''
Germany and Japan signaled they have no plans to
follow the example of the U.S. government, which
approved a package including tax rebates worth $168
billion.
``Each nation should overcome obstacles by taking
steps that are the most suitable to them,'' Japanese
Finance Minister Fukushiro Nukaga said.
Faster Yuan Gains
The G-7 agreed that China should do more to defuse
global trade tensions by allowing the yuan to climb
against the dollar and other currencies.
``We encourage accelerated appreciation of its
effective exchange rate,'' the statement said. While
the yuan has climbed 4.5 percent against the dollar
since the October statement, it's risen just 3 percent
against the euro in the same period.
``I'm a bit surprised by the pressure they're adding
on China,'' said Tim Condon, head of Asian research at
ING Groep NV in Singapore. ``I thought China would be
under the radar at this meeting given the rapid pace
of yuan appreciation that China has been observing
this year.''
French Finance Minister Christine Lagarde said the
stronger euro ``continues to pose difficulties for
European exporters.''
Trichet said ``we are particularly attentive to what
happens in the bilateral relationship between the euro
and the yuan.''
The statement made no mention of the weakness of the
dollar.
Credit Crisis
The G-7 also pledged to act on the recommendations of
the Financial Stability Forum of regulators, which
yesterday proposed measures to prevent a repeat of the
credit crisis.
Deutsche Bank AG Chief Executive Officer Josef
Ackermann said Feb. 7 rating downgrades for bond
insurers hurt by the subprime slump ``could be a
tsunami-like event.''
Italy's Draghi, who drafted the report, said banks
should publish more information about their losses and
improve risk management.
The report also said authorities must address
``potential conflicts of interest'' at credit-rating
companies and improve understanding of banks'
off-balance sheet positions, according to the
statement.
The G-7 asked the International Monetary Fund and the
Basel, Switzerland-based Financial Stability Forum to
report at the next meeting in April ``on their
respective roles in identifying potential
vulnerabilities and enhancing early warning
capabilities,'' the statement said.
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