G8 Live

G-20 leaders must face up to period of contraction

Fri, 21 Nov 2008 03:45:00 +0000

WORLD leaders keep insisting that their first priority in dealing with the economic and financial crisis is to ‘restore growth’ - whether by monetary or fiscal means, or both. Yet, it will need stimulus on a truly massive scale to compensate for the colossal loss of real and paper wealth unleashed by the financial implosion which is now destroying spending power, consumption and economic activity around the world.

By making such claims, as they did at last weekend’s G-20 summit meeting in Washington, leaders hope to demonstrate statesmanship. Yet, it is cruel deception to encourage anyone to believe that the growth switch can be thrown back on once the fuse has been mended, so to speak, and that light will then be restored. We are almost certainly in for a long period of economic gloom if not exactly a new dark age.

To get this in perspective, think of the untold trillions of dollars wiped off the value of real estate, stock markets, bank loans and other tangible or financial assets since the sub-prime mortgage crisis erupted. Admittedly, much of this was ‘paper’ wealth, but it provided collateral for easy credit from banks and other lending institutions to finance an orgy of consumption in the United States and elsewhere. That spending called forth a matching surge in production of goods and services, which in turn propelled economic activity to boom levels and created high employment for those fortunate enough to have jobs.

Advanced and some emerging economies alike shared the prosperity as the process of securitisation propelled credit creation to new peaks by destroying direct contact between lenders and borrowers. By contrast, fiscal stimulus announced so far by governments amounts to not much more than US$1 trillion. To take this figure up to a level where it would match the amounts lost would require fiscal stimulus big enough to bankrupt many governments. Or, it would need the money printing presses to be running at a rate that would induce heart failure among central bankers. Even if the latter course were adopted - which is all but unthinkable - there would certainly be no guarantee of a resumption of economic activity to anything like pre-crisis levels. As they say, you can ‘lead a horse to water but you cannot make it drink’. The consumer - whether in the US, Europe, Japan or wherever - is in defensive (saving) mood and the days of conspicuous consumption are over. Despite a cursory nod in the direction of Japan’s post-bubble economy experience, policymakers appear to be ignoring the basic lessons that Japan can teach. These are that once a nation’s financial system is broken, you can pump money into it for all you’re worth (and more) but it won’t reach the parts you want to get it to.

Another is that fiscal stimulus big enough to compensate for the bursting of a monetary bubble also tends to ‘break’ the government - witness Japan’s government debt to GDP ratio of over 150 per cent. Growth will be restored at some point, but it will have to be from a much lower base of economic activity than that at which leading economies went into recession.

In the meantime, the most that national leaders should realistically be promising is to cushion the fall as best as they can. To claim, as many of them are doing, that the right thing to do is to spend now and worry about government deficits later is dangerous and is courting the kind of chronic deficit problems that Japan now has even after nearly 20 years since its bubble burst. Likewise, to pump money too heavily is to court first the danger of a ‘liquidity trap’ and later of hyper-inflation. This is a gloomy prognosis, yet realistic. A long period of credit-based economic expansion of the kind we enjoyed until now must be matched by a suitable period of contraction if the system is to be purged of excess. This may not be the message that would make national leaders loved but it would probably make them respected. Consumers know they have binged too much, even if they could not help themselves.

Another way in which some G-20 leaders were fighting yesterday’s battles rather than tomorrow’s when they met in Washington was by focusing so much on financial regulation. This is like locking the stable door not just after the horse has bolted but after it has lost all desire to flee.

The ‘animal spirits’ that drove the excesses leading up to the current crisis have been curbed already by the financial and economic collapse and we would be better off trying to find ways of dealing with the resulting threat of deflation. Some G-20 heads, including US President George W Bush, were also busy demanding that ‘free market principles’ be preserved in any reforms enacted in the wake of the crisis. Rather ironic, really, seeing that not only have Wall Street institutions crumbled ignominiously as a result of their own errors but also Detroit’s car giants are poised for collapse now that the credit machine is broken. Should the market be saved from its own failures?

Author: Anthony Rowley
Source: Business Times Singapore

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Sarkozy, Blair to host Paris meeting on world economy

Fri, 21 Nov 2008 03:43:13 +0000

President Nicolas Sarkozy and former British prime minister Tony Blair will host a meeting in Paris in January to look at concrete ways to respond to the economic crisis, the French presidency said.

The meeting on January 8 and 9 will be held ahead of a second G20 meeting scheduled for early next year in London to agree on a response to the finance crisis that has since spilled over into the broader economy.

“This is a crucial period for our economies and our social organisations,” Sarkozy said Wednesday. “Now more than ever, we need to show that we can propose concrete solutions to the challenges that we are facing.”

The list of guest speakers include Nobel prize-winning economist Joseph Stiglitz, US philosopher Francis Fukuyama, Indian economist Amartya Sen and his French colleague Jean-Paul Fitoussi.

Blair said the conference, to be dubbed “A New World: Values, Development and Regulation”, would make a vital contribution to efforts to come to grips with the economic downturn.

The leaders of 20 of the world’s biggest or fastest growing economies agreed at a summit in Washington this month to join forces to galvanize growth and overhaul the world’s financial architecture.

But they stopped short of announcing specific steps such as coordinated stimulus spending.

The G20 group comprises the G8 plus key emerging economies such as China, India and Brazil, as well as other major economies, including Australia, Indonesia and South Korea.

Junior minister Eric Besson earlier this month said the meeting would discuss ideas for a “new capitalism” that France hopes will make room for more state regulation and oversight.

The current crisis is a “challenge but also a terrific opportunity to revisit the fundamental values of capitalism”, Besson told AFP.

Source: Agence France Presse

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Canadian government promises economic stimulus

Fri, 21 Nov 2008 03:42:28 +0000

TORONTO (AP) - Canada’s Conservative government said Thursday that it will boost spending to help the economy recover from one of its biggest downturns since the Great Depression.

Prime Minister Stephen Harper also told Parliament that Canada would join in any major international spending effort to stimulate the economy on the heels of last weekend’s G-20 meeting. The summit in Washington drew leaders from the world’s biggest industrialized and developing economies.

The global leaders left the summit with a broad plan aimed at combatting the global economic meltdown.

“World governments have resolved that they will undertake whatever financial, monetary and budgetary measures are necessary to cope with the crisis, and let me be clear — this is also the position of the government of Canada,” said Harper in a speech to Parliament.

Harper spoke of Canadians facing a future of unprecedented uncertainty but said that few countries are better prepared to deal with the worsening crisis.

Harper’s speech was given minutes after Canada’s independent parliamentary budget officer delivered a report forecasting that the federal government will run a 3.9 billion Canadian dollar ($3 billion) deficit next year unless there are major changes to fiscal policy.

Budget officer Kevin Page said job losses, a clampdown on credit, and weak consumer confidence will likely lead to a modest federal deficit in the fiscal year starting April 1. A lesser deficit of 1.4 billion Canadian dollars ($1 billion) is expected the following year before the federal government goes back into a slight surplus by 2012, said Page.

Page’s report runs counter to Harper’s earlier proclamations that the country would not run a deficit.

Harper was re-elected as the country’s minority Conservative leader Oct. 14, and during his election campaign he promised that his government would not go into the red.

However, he said Thursday that his government would not seek to balance the budget by raising taxes or cutting essential services in a time of economic crisis.

Harper instead said that his government will provide short-term stimulus to jump-start the economy, but was mum on details.

In the long-term, Harper said he will encourage investment in the country’s mining sectors by raising foreign investment incentives, eliminating interprovincial trade barriers and improving labor mobility, both nationally and internationally.

He also emphasized ensuring that America would have greater access to Canadian energy sources, which, he said, would further boost Canada’s economy, while protecting the United States’ own security.

Harper noted that his government plans to expand the country’s international trade relations and eliminate any obstacles to trade with the United States.

“We’re looking forward to working with the new administration in Washington to strengthen the deep bond of friendship and cooperation with our good neighbor and largest trading partner. We will work closely to ensure our mutual protection with the United States while seeking to eliminate any obstacles to trade and travel undertaken in the name of U.S. national security,” said Harper.

He urged Parliament to ratify a trade agreement with the European Union, and said his government will expand its investments in Asia.

Canada’s Finance Minister Jim Flaherty will deliver a fiscal update next week with more detailed predictions about the economy.

Author: Charmaine Noronha
Source: Associated Press Newswires

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G8 should include China, India, others, panel says

Fri, 21 Nov 2008 03:40:51 +0000

WASHINGTON, Nov 20 (Reuters) - The Group of Eight major industrialized countries should be doubled to include Brazil, China and India and other nations to better tackle global challenges like climate change and economic stability, a blue chip panel said on Thursday.

The panel, which included European Union foreign policy chief Javier Solana, former U.S. Secretary of State Madeleine Albright and former World Bank President James Wolfensohn, argued that the G8 has become “outdated.”

“The leadership and mandates of key international institutions, from the G8 to the U.N. Security Council, have not kept pace with the new powerholders and dynamic threats of a changed world,” the Managing Global Insecurity Project said in a report.

“Traditional powers cannot achieve sustainable solutions on issues from economic stability to climate change without the emerging powers at the negotiating table,” said the group, formed by the Brookings Institution think tank and by research centers at New York University and Stanford University.

The report recommended expanding the G8, which is comprised of Britain, Canada, France, Germany, Italy, Japan, Russia and the United States, to include Brazil, China, India, Mexico and South Africa. It also proposed adding Indonesia, Turkey, Egypt or Nigeria to create a Group of 16.

Thomas Pickering, a former U.S. undersecretary of state for political affairs, said some nations might resist seeing their own influence diluted but said solving some problems required a broader range of actors.

“Rather than to argue about the size of the table and the number of people present, it would be much better to take the view that if a country has a substantial contribution to make to the resolution of the problem … then they probably ought to be at the table,” he said.

Source: Reuters News

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Europe must act as one on the world stage

Fri, 21 Nov 2008 03:38:57 +0000

When Italy takes up the chair of the Group of Eight leading nations in January the context will be very different to that of its 2001 presidency. Back then, the G8 was dealing with the consequences of a unipolar international system. Come 2009, near the top of the agenda will be the enlargement of the club to new powers, starting with China and India. But it is still not clear whether Italy will preside over the reform of the G8 or its burial; which, in a way, is the same thing.

Any reform of the G8 starts from the assumption that the current format is outdated. Until recently, however, it was not clear whether all G8 members wanted to engage in much more than an outreach exercise.

Equally, it was not clear whether a country such as China actually wanted to join the club and shoulder the attendant responsibilities. The financial crisis has overtaken such hesitation on both sides.

In 2009, as Britain chairs the G20, Gordon Brown, the prime minister, has the opportunity to take the lead on international financial reform. In a few months, the G8’s own enlargement may appear superseded by the G20. Co-ordination between the Italian G8 and the British G20 presidencies is much needed: it will be crucial in defining a division of labour and allowing a smooth transition to a double-digit international club.

But is the G20 a better format? The US has never liked the idea of enlarging already unwieldy forums. This time around things are different, with Barack Obama, the president-elect, shifting the US foreign outlook from “westernism” to “globalism”. Europe would find itself in a very delicate position if it wanted to object. A smaller and more effective group - yet still representative of the new global balance of power - can only be achieved by slashing Europe’s delegation.

There lies the European paradox. For a decade, Europeans have been the main proponents of “reformed” multilateral governance. They have played a decisive role in responding to the financial crisis and came up first with the idea of a “new Bretton Woods” (whatever that means in detail). Yet, a fragmented Europe is also an obstacle to that very goal: why should the rest of the world have to cope with a plethora of people, each claiming to speak for “Europe”?

The simple truth is that, today, Europeans are over-represented in all international institutions. A single euro-zone voice at the International Monetary Fund, for instance, would definitely make sense. Everybody knows, however, that this is not going to happen any time soon. This contradiction cannot remain if Europeans wish to be taken seriously when they promote international governance reform. Instead of talking in the abstract about a single EU voice, Europeans should forge pragmatic arrangements to simplify and make more effective their external representation.

The lesson of the financial crisis can help. When Britain first announced sweeping intervention in the banking system, the markets did not react positively. But when the Eurogroup embraced the same proposition, it brought along the entire G7 including the US. The decisive role was played by a body that has no formal existence - the eurozone heads of state and government, plus Mr Brown, the European Central Bank and the European Commission.

The lesson to be learnt is hardly new: progress occurs in Europe only when strong national leadership combines with the collective weight of the eurozone. This suggests that we should be actively building on the “Eurogroup plus” format set in motion by the financial crisis. Such an arrangement may look like the second death of the Lisbon Treaty. But if and when the treaty enters into force, Europe could be represented by a similar configuration, gaining the advantage of a stable presidency.

There is indeed a potential mismatch between enlargement and effectiveness: Europe knows that by first-hand experience. This is why any enlargement of the G8 may ultimately lead to smaller informal cores, some of which (such as a de facto G2 between the US and China, for instance) would leave Europe aside. Yet the eurozone, which is also expanding, is simply too important to be overlooked. Precisely when the old club is opening up to new powers, a like-minded transatlantic core becomes more important than ever - provided Europe proves capable of better organising itself.

Author: Marta Dassu
Source: Financial Times

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European Council : Summit To Build Strong Front Against Financial Crisis

Tue, 14 Oct 2008 00:09:02 +0000

The draft conclusions of the European Council of 15 and 16 October express the resolve of the heads of state and government “to take concerted and integrated action to protect the European financial system”. In short, the heads of state will spare no effort to establish a new corpus of EU doctrine for banks, as announced by Ecofin Council President Christine Lagarde, in Luxembourg on 7 October. The member states’ leaders recognise that “Europe is now suffering severely from the international financial crisis,” and that its impact is being felt on growth, which has dropped sharply, and on “European businesses, particularly SMEs, which are finding it increasingly difficult to obtain finance”.

The Council notes that an overarching response is necessary in the European Union and with international partners, which incidentally will be launched at the G7 meeting of finance ministers in Washington this weekend.
The European Council goes on to reiterate the commitment that “everything necessary will be done” to protect the stability of the financial system and “to ensure that deposits are protected in all circumstances”. It notes that national decisions must take account of their impact on other member states and be in keeping with the common principles laid down by the European Council. The heads of state insist that “measures to support banks in difficulty should go hand in hand with measures to protect tax payers, to secure accountability on the part of executives and shareholders and to protect the legitimate interests of other market players”.
Due to the “exceptional circumstances,” the EU rules must be enforced swiftly and flexibly, the draft conclusions say.
The Council observes that financial establishments must implement “recommendations on the transparency of their commitments and risks” in a credible way.
The 27 heads of state insists on a sharp acceleration of ongoing work to strengthen rules, including the Capital Requirements Directive. The draft conclusions welcome the European Commission’s intention to present a “legislative proposal soon to tighten up the rules on rating agencies” and their European supervision. The Council also calls for “speedy decisions on the transparency and security of transactions on credit derivatives markets and the development of European rules on the security of deposits to ensure that savers are protected”.
ACCOUNTING STANDARDS
Following on from the declaration by the Ecofin Council presidency, the European Council highlights the need for a “decision at the end of this month on the accounting standards applicable to financial institutions and their interpretation, in order to give a more balanced picture of the true value of their assets with effect from the third quarter of 2008”. There is confirmation among the heads of state of the change in banks’ accounting rules with retroactive effect to the quarter that ended on 30 September 2008. This measure is the one aimed most at putting a halt to the stock market crash.
The European Council notes that the real performance of managers must be reflected in their remuneration, including severance pay ( golden handshake’), which should be based on the managers’ contribution to the companies’ success.
“The European Union must work with its international partners on a genuine, all-encompassing reform of the international financial system based on the principles of transparency, sound banking, responsibility, integrity and world governance.” With that aim in mind, the European Council “calls for a summit to be held to this end with [the EU] main partners as soon as possible — in other words, the new Bretton Woods conference’ sought by President Nicolas Sarkozy.
The draft conclusions are available at www.europolitics.info [http://www.europolitics.info] > Search > 235030

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G7 announces plan of action for finance crisis

Sun, 12 Oct 2008 23:27:50 +0000

Group of Seven finance chiefs announced Friday a plan of action to fight a global crisis including the use of “all available tools” to support key institutions and prevent their failure.

“The G7 agrees today that the current situation calls for urgent and exceptional action,” a statement released by the US Treasury said.
“We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth.”
The plan states that the G7 would “take decisive action and use all available tools to support systematically important financial institutions and prevent their failure.”
The communique was released after a meeting of finance ministers and central bankers of the United States, Germany, Japan, France, Britain, Italy and Canada in Washington.
US Treasury Secretary Henry Paulson, in a separate statement, said the G7 had “finalized an aggressive action plan to address the turmoil in global financial markets and the stresses on our financial institutions.”
“This action plan provides a coherent framework that will direct our individual and collective policy steps to provide liquidity to markets, strengthen financial institutions, protect savers, and enforce investor protections,” said Paulson, the architect of a 700-billion-dollar bank bailout passed by Congress last week.
“Never has it been more essential to find collective solutions to ensure stable and efficient financial markets and restore the health of the world economy,” he said.
The G7 statement said the members will “take all necessary steps to unfreeze credit and money markets and ensure that banks and ensure that banks and other financial institutions have broad access to liquidity and funding.”
Members would “ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.”
The statement also said the G7 would ensure that national deposit insurance and guarantee programs “are robust” to allow people to have confidence in the safety of their deposits.
The plan also calls for “action, where appropriate, to restart the secondary markets for mortgages and other securitized assets.”
The G7 statement came against a backdrop of a growing financial firestorm as panic spread in global markets.
The G7 finance chiefs met ahead of the International Monetary Fund and World Bank annual meetings opening Saturday, drawing finance leaders and private financiers from the twin 185-nation institutions members.
The gathering of the planet’s finance leaders is being held amid a stunning loss of confidence in the global financial system that has sent markets into a freefall.
The major industrial powers have already pumped massive amounts of liquidity into the global banking system in an effort to unclog credit markets, and led a coordinated cut in interest rates.
But panic has still gripped the markets, which have hit multiyear lows in the United States and most other countries amid loss of confidence.
Stock exchanges from Tokyo to London suffered more staggering losses Friday, adding to the turmoil for finance ministers from the G7 to discuss.

Source: Agence France Presse

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G20 ‘vital’ to easing global market turmoil Global turmoil…

Sun, 12 Oct 2008 22:55:53 +0000

Analysts say a global response from this weekend’s Group of 20 (G20) meeting is crucial to addressing the financial crisis.
The Australian sharemarket has fallen below 4,000 points for the first time since 2005, with investors gripped by recession fears.
Members of the industrialised and emerging nations forum are gathering in Washington to discuss the turmoil.

Citibank managing director of economics, Stephen Halmarick, says the moves made so far by international authorities will not be sufficient to avert a global recession.
“Investors will be looking to the weekend G20 meeting, which our Treasurer’s attending, to reinforce that it’s going to be a global response to this global crisis and looking for some stabilisation there,” he said.
At about 3:00pm AEDT, the All Ordinaries index had fallen as much as 7.9 per cent to 3,953, while the ASX 200 was down 317 points to 4,004.
The Australian dollar was trading at 66.44 US cents, after reaching as high of 71 US cents overnight.
New York’s Dow Jones Industrial Average and S&P 500 both lost more than 7 per cent overnight.
Earlier, Mr Halmarick said the local currency has been oversold.
“The Australian economy is going to actually outperform the economies of Europe, New Zealand and Japan, so against those other currencies the Aussie dollar probably is undervalued at these levels, but at times of these extreme volatility the Aussie dollar’s going to continue to trade in very wide ranges,” he said.
“The extent of the volatility is just completely unprecedented.
“We’ve had a 13 cent range in the Aussie dollar this week, normally you wouldn’t see that range over the course of the year.”
Tokyo’s stock market was also taking a heavy battering.
The Nikkei index was down about 11 per cent in morning trade.
In Seoul, share prices dropped just over 5 per cent within 15 minutes of opening.

Source: Australian Broadcasting Corporation (ABC) News

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As stocks bleed, G7 plays down quick fix

Sun, 12 Oct 2008 00:06:18 +0000

Global financial leaders meeting in Washington have played down expectations for a quick fix for the maelstrom in world markets, as a violent stock selloff intensified and worries grew about bank failures.

The Group of Seven finance chiefs were studying a set of joint principles and steps to tackle the financial crisis, including a commitment to keep major banks functioning, a European source said ahead of a statement from the leaders.
“We are working on establishing a (response) at the global level,” the source said.
French finance minister Christine Lagarde said the G7 is unlikely to come up with a plan of action against the global financial crisis that will be the same for all nations.
“What I think is very important, is that (we get) at the same time a show of unity and coordinated responses,” Lagarde said.
“You cannot apply the same method to different market situations. What seems very important to me, is that we agree a common set of principles,” she said.
US president George W Bush insisted the raging global financial firestorm would be put out as panic-stricken markets suffered more staggering losses.
As stock exchanges from Tokyo to London to New York were sucked deeper into the turmoil, Bush blamed “uncertainty and fear” for much of the global financial meltdown but promised the crisis would be controlled.
“Anxiety can feed anxiety and that can make it hard to see all that is being done” to address the problem, he said in a White House statement. “We can solve this crisis, and we will,” he promised.
The chaos deepened as he spoke.
Wall Street’s blue-chip Dow Jones Industrial Average saw wild gyrations, slumping 700 points at the opening, before a sharp rally and subsequent slide. At 1920 GMT (0620 AEDT Saturday) the index was down just 0.56 per cent.
“The stock market is playing out a drama that would have left William Shakespeare shaking his head,” said Fred Dickson, chief market strategist at DA Davidson & Co.
“We are witnessing one of the biggest and fastest market meltdowns in the last 60 years. We are also seeing an incredibly oversold market continue to emerge although what we need now is for potential buyers who hold plenty of cash, to emerge and collectively begin to take advantage of the distressed market situation.
“Our best guess is that won’t happen until the US government steps in and announces that it will guarantee inter-bank lending and the entire $US2.2 trillion ($A3.22 trillion) sitting in demand deposits at US banks.”
London’s FTSE 100 index skirted close to a 10-per cent loss before a slight pullback. The Paris CAC 40 dived 10.57 per cent and there were similar losses in Frankfurt.
“We are drowning in a sea of red numbers,” said Barclays Wealth analyst Henk Potts. “The reality is that most investors have been spooked by the sheer pressure that the credit crunch is putting on the global economy.”
Japan’s Nikkei-225 index closed down 9.62 per cent, Hong Kong lost 7.2 per cent and Singapore 7.34. Tokyo briefly halted some trading in futures and options as the Nikkei saw its biggest fall since the crash of October 1987.
A fresh injection of $US45.5 billion ($A66.6 billion) into Japanese money markets failed to stop the collapse as the crisis claimed its first Japanese victim, with Yamato Life Insurance filing for bankruptcy protection.
Nowhere was immune from the rout. South America’s largest stock market, in Sao Paulo, was suspended after the market slid more than 10 per cent. Trading in Moscow was also halted.
With oil prices falling below $US80 a barrel amid gloomy predictions for the world economy, pressure grew for more coordinated international action.
Japanese prime minister Taro Aso, chair of the Group of Eight, said he would call an emergency summit if the Washington talks this weekend did not reach a deal.
European heads of state and government meanwhile agreed to hold a financial crisis summit in Paris on Sunday to “define a joint action plan for the eurozone and the European Central Bank”, the French presidency said.
Despite repeated pledges to coordinate their action, EU governments have often gone their own ways so far in tackling the crisis at the national level.
In Berlin, reports said Germany is working on a plan to partially nationalise its banks along the lines of a similar British move this week.
Die Welt said the plan involves a capital injection of more than 10 billion euros ($A20 billion) in return for equity stakes in the banks and more than 100 billion euros ($A200 billion) to guarantee loans between banks.
Icelanders vented their fury at central bank chief David Oddsson, blamed for the country’s financial collapse, as the government appeared unable to ward off national bankruptcy.
“It will be very, very difficult for Iceland” to pull itself out of the financial crisis, the director of Iceland’s National Economic Institute, Gunnar Haraldsson, told AFP, adding that the obstacles were piling up daily.
Icelandic prime minister Geir Haarde has insisted the country was not bankrupt, as its economy appeared to be on the verge on collapse amid the global financial woes, and professed his backing for the central bank chief.

Source: SBS World News Headline Stories

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Dow takes another bath, trading within its largest ever range, finishing 128 points in the red; G7 leaders issuing communique

Sun, 12 Oct 2008 00:04:45 +0000

Wall Street has been on another roller coaster ride, closing in the red again.
The volatile Dow Jones Industrial Average traded within a one thousand point range, its widest ever. On opening, it plunged almost 700 points, rose more than 300 before closing down 128 to 8,451.

It was also a Black Friday in Europe. Finance stocks were worst hit as indicator boards turned red in Frankfurt, Paris and London, ending a week of unprecedented losses. The FTSE took a nine percent hit as the wave of uncertainty rippled through the markets.
The continuing turbulence prompted US President George Bush out onto the White House lawn to make another statement on the financial crisis in an effort to quell investors’ fears.
“The United States government is acting. We will continue to act to resolve this crisis and restore stability to our markets.”
Finance leaders from the world’s richest nations have promised a coordinated response to the credit crisis, but will not back a British plan to guarantee lending between banks. The G7 is expected

Author: Tim DOWER
Source: Newstalk ZB Dow Jones

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G7 summit: A weekend to save the world

Sun, 12 Oct 2008 00:03:59 +0000

“The global economy is in its fifth year of robust growth,” began the statement from Alistair Darling and his fellow finance ministers from the G7 rich nations in October 2007. Sure, the credit crunch was already biting and Northern Rock was hooked up to government life support, but the men and women running the world’s most powerful economies were glass-half-full types. “We have acted resolutely to protect the systemic stability of global financial markets”, they said, and concluded that the outlook was one of “strong global fundamentals” and “well-capitalised financial institutions”.
Those same oracles are meeting again this weekend in Washington, except this time there is no room for self-delusion. There are two types of G7 summit. The first are exercises in back-slapping. This one must fall into the second category: as with the Gleneagles commitment in 2005 to boost aid to Africa, or the 1985 Plaza accord to weaken the dollar and so boost the US economy, leaders need to come up with bold action — now. They have time, just, and an almost intolerable amount of pressure: if rich nations cannot agree this weekend on a plan to stem the banking crisis, the panic seen in financial markets yesterday will be nothing compared to what happens on Monday.
What should a rescue plan look like? There are two essential preconditions. First, it must be global. So far, only the US and UK have announced a full-blown scheme. But this is a global crisis that demands a global solution. Second, any announcement must have meat, rather than bare bones. Diplomacy is often a game of holding statements and consensual platitudes; this time, these will have worse than no effect. Instead, a timetable should set out the steps to be taken by all countries, and when they will take them.
If there is a saving grace in this bleak situation, it is this: different governments need not do different things; they need only do the same things. That is surely easier to manage, especially with the powerful incentive that countries which stand apart are likely to be picked off by financial markets. The common steps this paper would suggest start with an unlimited guarantee on deposits in domestic banks. Such assurances have been undermined by the uncertainty over how nearly bankrupt Iceland will redeem its savers’ money. Nevertheless, they are an essential way of stemming panic among bank customers and for governments to show voters that their interests are being protected. As George Bush remarked yesterday afternoon, “anxiety can feed anxiety” — it is essential that governments soothe that anxiety. Officials should also be prepared to suspend trading in securities in the banking and insurance sectors. The wild swings seen yesterday on stockmarkets surely make any bank rescue as hard as standing on the sea.
The next move is for each treasury to call in their most important banks, work out which are not viable, and wind them up. Most of the other institutions will need capital injections, which governments should give in return for equity stakes, and conditions that executives do not throw away capital on bonuses and dividend payments. Officials also have to increase liquidity by underwriting all lending between banks. Finally, there needs to be action to boost the wider economy. As it is, the best case now looks like a global recession next year. As that outlook gets worse, individuals and businesses will default on their loans, and the banking crisis will intensify. Big central banks should cut interest rates again this week, by half a percentage point or more. And governments must start raising public spending or cutting taxes. These suggestions are aimed at the short term, at restoring stability to banks rather than reforming them. They certainly do not replace an overhaul of the financial system. But that must come later. The priority now is to stop a financial crisis turning into a depression.

Source: The Guardian

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G7 ministers forced to think the unthinkable: World leaders consider options to avert financial meltdown

Sun, 12 Oct 2008 00:02:49 +0000

Finance ministers from the G7 knew what they had to do when they met last night: come up a rescue plan for the global system which would be simple, decisive, co-ordinated and swift. And, unlike any of the other plans over the past 14 months, it must be effective.

Faced with what they accept is the threat of financial meltdown, policy makers have had to think the unthinkable. Ideas floated in Washington yesterday were not remotely in prospect even a month ago.
The sense of urgency has increased, however, since the collapse of Lehman in mid-September propelled the crisis into a new and dangerous phase. There are now few takers for the purist approach: allowing banks to fail, with the “creative destruction” giving a leaner and cleaner system. Advocates of this “Austrian school” may still exist in universities, but not in any of the G7 finance ministries.
The US treasury Secretary, Henry Paulson, appeared to have dabbled with this sink-or-swim philosophy when he allowed Lehman to go bust, but the subsequent market mayhem has pushed him in completely the opposite direction.
Last night it was full-scale nationalisation rather than a free-market solution that was likely to be adopted by the G7. It is accepted that if the current plans to calm the markets through state-backed recapitalisation of banks fails, then there will be no alternative but for governments to take them over — lock, stock and barrel. Paulson’s answer, the $700bn troubled asset recovery plan, was supposed to be a turning point in the 14-month credit crunch, but in Washington last night there were broad hints that the Bush administration now views it as only a partial solution. The US is drawing up its own plan to pour public money into Wall Street banks.
Instead, attention is focused along the lines of the proposal outlined by Alistair Darling on Wednesday — an emergency package to save UK banks from imminent collapse. To work on an international scale, three things need to happen.
First, all G7 countries immediately agree to take stakes in their banks. Japan, which went through its own bank crisis in the 1990s, was telling its G7 partners yesterday that delay is dangerous.
Second, to guarantee loans between banks in the interbank market, provided they sign up to the government’s recapitalisation programme and pay for the privilege.
It is the total shutdown of interbank markets that, more than anything, scared the authorities into action, because it is now clear that the drying up of credit is starting to have a profound impact on the ability of businesses and households to function. Under the Darling proposal, and now being considered elsewhere, the government stands behind any trade between banks, thereby allowing the interbank market to thaw out.
While the first two elements increase the supply of credit, central banks also recognise that demand for loans has been severely shaken by the crisis.
So the third leg is for co-ordinated interest rate cuts of the sort seen on Wednesday. Just weeks ago, the Bank of England was fretting about the possible risk of inflation becoming ingrained: events of the past month have banished such concern.
The three-fold plan is seen by Darling and Mervyn King, the Bank’s governmor, as a comprehensive package — but if it fails to restore confidence, there are a few other shots left in the locker.
One is for central banks to use their balance sheets to buy up all the debts of the commercial banks — a step governments would take with extreme reluctance since it exposes the taxpayer to huge risk.
A second idea would be a blanket guarantee for all lending in the interbank markets. Again, this is treated with caution, since it would be tantamount to nationalisation. A third is for governments around the world to guarantee all bank deposits.
Finally, policy makers could embark on what economists call quantitative easing. In extreme circumstances, governments flood the financial system with money — an idea originally likened by economist Milton Friedman to governments dropping sacks of cash out of helicopters for the public to pick up and spend.

Author: Larry Elliott and Heather Stewart
Source: The Guardian

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Market losses: Fear takes over from reason as traders see no end to turmoil

Sun, 12 Oct 2008 00:01:32 +0000

Panicked investors yesterday pushed the index of Britain’s top 100 companies to a four-year low as fears took hold that politicians had lost control of the worsening bank crisis.

Brokers said concerns continued to plague the markets that individual efforts by G7 governments were proving haphazard and shares would fall as long as politicians were unable to arrest the deteriorating position of banks.
London’s FTSE 100 index slumped almost 9% to register its worst week since the crash of 1987. The FTSE 100 has plummeted 21% over the week — wiping more than pounds 250bn off the value of stocks in the process.
On Wall Street, the Dow Jones Industrial Average plunged by more than 600 points in the first few minutes of trading, but recovered most of its losses later to finish 128 points down on 8,451.
Anthony Conroy, head trader at BNY ConvergEx in New York, said: “There’s a tremendous amount of emotion in the market. People are trading emotionally, rather than intellectually.”
Market participants said there was a sense of scepticism about political action to dampen the crisis, with few holding
out much faith that governments can act in a united fashion to heal financial wounds.
Big fallers in the US included the insurer AIG and banks Morgan Stanley, which saw its shares plunge 34%, making a 65% drop this week alone, along with Goldman Sachs, as investors waited uncertainly to see the precise form of aid and financial guarantees on offer from public authorities.
“Fear has been running rampant all over the street. Fear and greed, that’s what rules the street,” said Dave Henderson, a floor trader on the New York Stock Exchange for Raven Securities Corp. “I think the carcass has been stripped to the bone.”
On the US markets, losses for the year to date have reached $8.3 trillion, based on falls in the value of 5,000 top publicly traded American companies.
The FTSE 100 finished below the 4,000 mark at 3932.1 — its lowest close for more than five years.
Further falls
Alistair Darling warned that it was “essential” that the world’s leading economies took action to stabilise financial markets. In Washington for meetings of the G7 finance ministers and the IMF, Darling said that it was not enough to “just talk about these things”.
However, most UK banking analysts advised their investor clients to steer clear of the sector until the shares had fallen further.
Investment bank Credit Suisse led the way yesterday with a report declaring that while banks had fallen in some cases by more than 90% from stockmarket highs and to 80% of their basic asset value, investors should wait until they had fallen further before buying shares.
Analysts said stockmarket falls on both sides of the Atlantic could be explained by other factors, including tough times for hedge funds, the Yom Kippur holiday and the febrile nature of stockmarkets, which can lead to panic.
Deadlines
Like other investors, hedge funds have been selling heavily in recent weeks. A quarterly redemption deadline, which allows investors to pull out their money from hedge funds each quarter, was reached at the end of September. Redemptions were understood to be high after a poor year for the industry, and forced many hedge funds to sell their stock market holdings.
The Jewish holiday of Yom Kippur meant Wall Street’s trading floors were less crowded than usual on Thursday, when the US markets suffered their biggest fall in percentage terms since 1987. A lack of volume can aggravate volatility, making swings in price wider than usual.
For superstitious investors, Yom Kippur has resonance, coming shortly after the new year celebration of Rosh Hashanah. The great crash of 1929 began at roughly the same time of year, prompting an
adage among Jewish investors that it is wise to “buy on Rosh Hashanah, sell on Yom Kippur”.
Short-selling
A temporary ban on “shorting” nearly 1,000 financial stocks expired in the US at midnight on Wednesday, just hours before Wall Street suffered its worst plunge of the week. This meant that hedge funds could resume the pariah-like practice of betting on a fall in the shares of fragile companies. There are suspicions that short-sellers were instrumental in a sudden collapse in the shares of General Motors and Morgan Stanley, both of which had been previously shielded by the ban.
Panic
Unadulterated panic has set in for many private investors who are afraid to stand by while their nest eggs shrink. In the US, private ownership of shares is much more common than in Britain, and many people have been liquidating tax-efficient retirement accounts, known as the 401k.
“The market is just panicked,” said David Whys, chief economist at Standard & Poor’s in New York. “Everybody just wants to get their money and put it under the mattress.”
Unprecedented sums of money are being pumped into government bonds, and other “safe havens” such as gold and platinum are seeing prices rise.
9%
The fall registered in the FTSE 100 yesterday, wiping off more than pounds 250bn of the value of stocks

Author: Phillip Inman Andrew Clark
Source: The Guardian

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Race for a global rescue plan: Darling urges G7 leaders to copy UK bank bail-out Markets plunge again in day of frantic trading Government may be forced to take 50% stake in RBS

Sat, 11 Oct 2008 23:59:50 +0000

A crisis meeting of finance ministers and central bank governors from the west’s seven leading economies was last night considering joint action to bail out banks amid fears that a fresh wave of panic had pushed the global financial system to the brink of collapse.
Alistair Darling was urging his G7 colleagues in Washington to adopt Britain’s blueprint of using taxpayers’ money to buy up stakes in tottering banks, and warned that the time for talking was over.

With shares, oil and sterling all plunging at the end of a dramatic week, Darling said: “Governments must act. They must demonstrate to the world that they are prepared to act together to do whatever it takes to stabilise the situation.”
The G7 was galvanised into action yesterday by a nerve-shredding month on the financial markets. Yesterday alone, the FTSE closed down 8.9%, slipping below the 4,000 mark for the first time in five years. It fell 381.74 points, to 3,932.06, a 21% fall over the week, wiping pounds 250bn off the value of Britain’s companies in the City’s worst week since the crash of 1987.
Across Europe, every major market saw at least a fifth wiped off its value during the week. The Dow Jones Industrial Average fell more than 700 points at the opening bell, but later rallied to finish only 128 points down on 8,451. It had already lost more than 40% of its value since its peak last year. Shares in UK banks RBS and HBOS were among the worst hit, with RBS falling 25% and HBOS 19%.
The government may be forced to take a stake of up to 50% in RBS after its
market capitalisation was reduced to pounds 12bn last night.
With little sign that country-by-country plans have helped to kickstart lending, the G7 believes immediate action is vital to avoid a major slump. The past four weeks have seen the biggest cut in growth forecasts in living memory, and the IMF has warned that the world economy is “on the cusp” of recession. Darling said: “If international cooperation is to mean anything, it means governments have to move on from simply agreeing a general approach, and doing something to resolve the problems we are facing today. We haven’t seen anything like this for generations.”
The chancellor hinted the government would exact a price from UK bank chiefs deemed at fault for creating the crisis. He said taxpayers “won’t accept people taking large risks that have had hugely damaging effects, not just on individual institutions, but on the wider economic system. Agreements will be negotiated.”
Italy’s prime minister, Silvio Berlusconi, mooted the idea that stockmarkets throughout the world could be closed for up to a fortnight while governments work out a plan to restore confidence.
Foreign exchange markets were also hit by panic. Sterling at one point slumped to $1.68, a five-year low against the dollar.
Meanwhile, Gordon Brown dispatched a team of Treasury officials and lawyers to Reykjavik in an effort to reclaim some of the pounds 1bn of deposits from British savers under threat from the collapse of Icelandic banks. He said the Icelandic authorities must take the responsibility.
The intensification of the crisis has forced the US government to reconsider whether the $700bn plan to buy Wall Street’s “toxic waste” will now be enough to halt the most severe stockmarket crash since 1929. Officials are working on their own version of Britain’s bail-out. There were also reports that the treasury secretary, Hank Paulson, was considering guaranteeing all US bank deposits.
More details of the Treasury’s plan were unveiled yesterday, with the recognition that if it fails, wholesale nationalisation of Britain’s banking system is the only alternative. The government will buy up shares in the banks that choose to participate in the plan at market prices, and place them in an arms-length fund. When the immediate crisis is over, the Treasury hopes to offload the shares to investors.
George Bush appeared in the White House rose garden to try to reassure American voters and investors. “We are a prosperous nation with immense resources and a wide range of tools at our disposal,” he said. “Fellow citizens — we can solve this crisis. And we will.”
David Marquand, page 30 ≥
Polly Toynbee, page 31 ≥
Leader comment, page 32 ≥
Traders watch the markets fall shortly after the opening of the New York stock exchange yesterday Photograph: Mike Segar/Reuters
2-9 ≥
The chancellor Alistair Darling called for action and said: ‘We haven’t seen anything like this for generations’

Author: Larry Elliott Heather Stewart Andrew Clark
Source: The Guardian

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China, Japan Seek Bigger Role in Asian Fund

Sat, 11 Oct 2008 23:59:04 +0000

Strategy and Finance Minister Kang Man-soo will attend a meeting of G20 finance ministers, talks with the Japanese finance minister, and the annual meetings of the World Bank and International Monetary Fund in Washington Friday through Monday.
Attention is focused on if Asia’s top three economies — Japan, China and Korea — or Korea and the United States will agree to speed up efforts to tackle dollar liquidity.

Seoul recently proposed to a group of Asian countries expediting the creation of a fund worth 80 billion dollars to protect Asia from the global financial turmoil. China and Japan, however, have shown a lukewarm response to the idea.
Along with the Association of Southeast Asian Nations, Korea, Japan and China in May agreed to set up a foreign exchange pool of at least 80 billion dollars to respond to another regional financial crisis under a 20-80 burden division.
The problem is timing. Though Korea hopes to see tangible results before a meeting of Korean, Chinese and Japanese finance ministers in May next year, chances are slim because Beijing and Tokyo disagree over their roles.
Both are trying to make a greater contribution to gain a greater voice and power over the use of the fund.
China, which has the world’s largest foreign exchange holdings of 1.8 trillion dollars, says the contribution should be split based on each country’s foreign currency holdings.
Japan, which is second to China in foreign exchange holdings with one trillion dollars, insists the use of gross domestic product for determining the contribution.
In this regard, Kang said Korea will play the role of mediator at a news conference yesterday. “The Chinese finance minister is not coming to the United States this time. But if necessary, I will visit China to see him in person,” he said.
Kang will also explore the possibility of increasing the amount of the Asian fund.
Korea has sought to set up an international cooperation system because it believes the financial turmoil will not end quickly, even after it passes the critical month of October, and that this can be better overcome by a collective effort from countries.
“The financial market was even more volatile the day after the IMF confirmed its bailout offer to Korea in 1997. Similarly, even after the passage of the financial bailout bill, the U.S. market will unavoidably remain in confusion until questions over how to implement the bailout plan are answered,” Kang said.
“Though we should focus on easing anxieties until the end of October, we should also prepare for a prolonged battle.”
On a similar note, a growing number of private think tanks say Korea and the United States should create a bilateral cooperation system for liquidity. In a report, Samsung Economic Research Institute recommended building the won-dollar swap line between both countries’ central banks to receive short-term dollar liquidity from the Federal Reserve Board.
On the proposal, a Seoul official said, however, “As the won is neither a hard currency nor a strong guarantee, it is unrealistic.”
Business leaders of Korea and Japan, including Federation of Korean Industries Chairman Cho Suk-rae and Japan Business Federation (Keidanren) Chairman Fujio Mitarai, held the second Korea-Japan Business Summit Roundtable yesterday in Seoul. They focused on strengthening bilateral economic ties, such as building an industrial park in Korea for industrial parts and materials that Japanese investors have shown a strong interest in.

Source: Dong-A Ilbo Daily

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A world in crisis needs a new global order

Sat, 11 Oct 2008 23:58:07 +0000

The global credit crisis is spinning out of control and there is no end in sight. Yesterday was another dark day for financial markets. Virtually all the world’s major indexes took another steep plunge. With fear in the air, investors panicked.
The Hang Seng Index fell more than 7 per cent yesterday, taking its cumulative losses for the week to more than 16 per cent. Other markets in Asia took a similar beating; the Indonesian bourse remained closed. This followed the Dow Jones’ 7 per cent dive overnight. All eyes are now on the meetings of the world’s finance ministers and policy chiefs in Washington, which began yesterday. Decisive, bold and co-ordinated action from all the major economies — not just the G7 — is desperately needed to stop the world economy from sliding into the abyss. What started as a local problem on Wall Street is now a fully fledged global crisis and there are predictions of a deep recession.
Policymakers in the US and Europe have been lurching from one crisis to another. Each rescue, bailout or interest-rate cut has been interpreted by investors as an indication that things must be going from bad to worse. Far from restoring confidence to markets, people have been spooked. Meanwhile, the leaders of most major emerging economies have sat on the fence. But the meltdown is very much their problem too. With governments intervening massively in the markets, the credit crisis has become highly political. And it is beginning to take on a profoundly social dimension. The poor will suffer in a global downturn, causing further dislocations and possibly unrest in the developing world.
Desperate times require desperate — but imaginative — measures. Belatedly, policymakers are beginning to recognise the need for concerted policy responses. This started with Wednesday’s unexpected joint interest rates cuts by the US, Canada and European central banks, along with China. They are finally hearing the calls for united action from Dominique Strauss-Kahn, the International Monetary Fund chief, and Robert Zoellick, the World Bank president. The two institutions, much criticised for their misguided policy recommendations during the Asian financial crisis a decade ago, have shown a sharpened sense of what is needed this time. US Treasury Secretary Henry Paulson is right to convene a G20 meeting this weekend, putting major emerging economies such as China, India and Brazil on a similar footing to their richer counterparts.
But the west, and especially the United States, needs to recognise the realities of shifting world economic power. It can no longer pick and choose when poorer nations are allowed to participate and when to exclude them. As a debtor nation, the US needs massive capital to restore health to many of its leading corporations. It must overcome its nationalism to allow foreign ownership, which most likely will come from sovereign wealth funds such as those from China and the oil-exporting countries. Emerging economies holding US and European debt need to use their large reserves to buy up valuable assets as these debt holdings lose their value. It is in the interests of China and other emerging powers to help stabilise the global situation by shoring up the financial health of the US and the European Union, two of the mainland’s largest trading partners. They must be allowed to do so.
The world’s markets have endured an extraordinarily turbulent week. No one can say for certain what will happen next. World leaders must not fail when they strive for a solution this weekend.

Source: South China Morning Post

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G7 ministers aim to boost confidence in financial sector

Sat, 11 Oct 2008 23:57:22 +0000

The world’s top economic powers hoped that a guarantee to take action on the financial crisis would be enough to stop a global sell-off in stocks as they kicked off a meeting at the US Treasury on Friday.

But finance ministers and central bank heads from the Group of Seven (G7) industrial nations were reluctant to offer a common, cross-border solution to shore up banks on the brink of bankruptcy in their own countries, dpa reported.
German Finance Minister Peer Steinbrueck said the German government was open to taking a stake in its banks in order to help inject capital into the sector and warned that “case-by-case” interventions were no longer possible.
But he also said the type of government interventions would have to differ from country to country and did not suggest an international plan was in the works.
The White House Thursday said a similar plan to take stakes in banks was in the works for the US, as part of the 700-billion-dollar rescue package passed last week.
Alastair Darling, Britain’s Chancellor of the Exchequer, told the BBC it was “essential” that governments be “prepared to do whatever it takes” to help stabilize the global financial system, which has seen a rash of bank failures and bail-outs in the US and Europe since September.
“This is a genuinely global problem and we, all of us, all over the world, need to step up to the mark and do something about it,” Darling said.
Global stocks took another nose dive on Friday at the end of a tumultuous week. Major US stock indices were on track for one of their worst weeks in history.
IMF Managing Director Dominique Strauss-Kahn warned Friday that the only way to restore market confidence was through “government intervention which is clear, comprehensive and cooperative among countries.”
Strauss-Kahn on Thursday said the world was on the “cusp” of a recession after the IMF forecast global growth of 3 per cent next year. Growth below 3 per cent is considered a global recession by the IMF.
But while talking of coordination and pledging to prevent serious bank failures, the G7 is unlikely to make any commitment to jointly shore up the banking sector or guarantee loans between banks in order to ease the credit crunch, Bloomberg News reported, citing an official from a G7 member country.
Treasury Secretary Henry Paulson has also shown a reluctance to adopt joint measures that go beyond the key nations coordinating and consulting on their national plans.
“When we look at the G7, you have very different countries (and) financial systems with different needs, and so I think it would not make sense to have identical policies,” he said in a pre-G7 briefing Wednesday. “The key point is that we continue to work closely together.”
The G7 is one of a series of meetings this week in Washington between the world’s finance ministers. Paulson will be hosting a gathering of the world’s 20 leading economies on Saturday on the sidelines of the annual International Monetary Fund and World Bank meetings this weekend.

Source: Trend News Agency (Azerbaijan)

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Protect bank deposits to $100,000: Turnbull

Sat, 11 Oct 2008 23:55:54 +0000

Malcolm Turnbull is demanding the Federal Government guarantee bank deposits up to $100,000 and inject $6 billion more into the non-bank mortgage sector to instil greater confidence in Australia’s financial system.

As Treasurer Wayne Swan travelled to Washington to join other G20 finance ministers at a crisis meeting, the Liberal leader said Australia had to ensure its deposit guarantee scheme was in line with similar moves around the world.
“It’s really a testimony to the strength of our banking system that an explicit guarantee has never in the past been seen as required,” Mr Turnbull said yesterday. “Now there are very powerful reasons for having one in this climate and we believe that $20,000 is inadequate in this climate and that’s why we recommend it be increased to not less than $100,000.”
Under Mr Turnbull’s proposals, customers who have cash in so-called authorised deposit taking institutions — banks, building societies and credit unions — would effectively have deposits up to $100,000 guaranteed by the Government.
The Rudd Government is introducing legislation which would protect bank deposits up to $20,000 in a move the Prime Minister said would protect 85 per cent of deposits in Australia.
The concept first emerged from the HIH royal commission in 2003.
Finance Minister Lindsay Tanner said the Opposition when in government rejected the recommendations of the Council of Financial Regulators to introduce a deposit protection scheme.
As part of its $US700 billion bailout of the banking sector, the US Congress increased the deposit insurance coverage from $US100,000 to $US250,000 and in the past week, Ireland and Germany announced they would guarantee all bank deposits.
Mr Turnbull also wants an extra $6 billion invested in AAA-rated residential mortgage backed securities..

Author: Andrew Probyn And Shane Wright Canberra
Source: The West Australian

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Australia pushes G20 as global cure

Sat, 11 Oct 2008 23:54:39 +0000

Federal Treasurer Wayne Swan said on Friday that the reforms proposed by the International Monetary Fund to ease the global financial crisis would be best implemented by the G20 group of nations as they would provide political authority to have this agenda implemented urgently and comprehensively.’ Mr Swan’s comments are part of a greater push by Prime Minister Kevin Rudd for Australia to assert more authority on the world stage and eventually secure membership to the United Nations Security Council, according to commentators.

Author: Tony Walker and Anthony Hughes
Source: Australian Financial Review (Abstracts)

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Fear of worse to come as system teeters

Sat, 11 Oct 2008 23:53:13 +0000

Interbank lending has contracted in the past two days despite the dramatic measures taken by European governments and central banks this week, giving rise to fears of an economic recession in Britain and major European economies. Tensions have been growing within the European Union as governments disagree over the need for a co-ordinated European action. The bankruptcy of Iceland’s three major banks has created a political crisis between Britain and Iceland as British local government authorities and community organisations stand to lose money. This followed the British government’s launch of the biggest financial bail-out since the Great Depression on Wednesday. Apart from key G7 finance ministers and G20 meetings in Washington this weekend, European leaders will meet in Brussels on Wednesday.

Author: Geoff Kitney
Source: Australian Financial Review (Abstracts)

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Russia’s financial regulator again ordered the country’s two main stock markets…

Sat, 11 Oct 2008 23:51:59 +0000

Russia’s financial regulator again ordered the country’s two main stock markets to remain closed
The extended plunge comes despite the trillions of dollars being thrown at banking systems around the world and a coordinated round of interest rate cuts. But Prime Minister Kevin Rudd described the global response to the crisis as “uncoordinated” and hoped the emergency G20 group meeting would address regulatory challenges. Federal Opposition Leader Malcolm Turnbull said the Government must take immediate steps to salvage the economy by delaying the start for carbon emissions trading, expand a
proposed deposit guarantee scheme and invest more heavily in mortgage securities than planned. Mr Rudd, however, said restoring global confidence was the key challenge.

“There has been a series of, at best, uncoordinated actions by various national governments on this and this has not created an overall image of international government consistency on these questions.
“Overall, what we face is a broader problem of a lack of a demonstration of global and coordinated political will to deal with some of the big regulatory challenges that we now face. And that, I believe, is a key part of the confidence equation and that
must be addressed as the finance ministers meet in Washington this weekend.” Mr Swan said the IMF/G20 meeting presented a unique opportunity for international cooperation, but added that community pessimism was a big problem. “I’d describe the mood in New York as being sombre, as it is, I think, throughout the world at the moment.” In a bright spot for Australian homeowners, markets are now estimating the chance of a half a percentage point rate cut in November at 100 per cent, with the expectation of further falls to cut the cash rate to nearly 4 per cent by March.

Source: Canberra Times

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G20 LEADERS MUST LIFT CONFIDENCE

Sat, 11 Oct 2008 23:51:02 +0000

The weekend meeting is the best chance for a co-ordinated approach that restores global trust
FRANKLIN D. Roosevelt’s statement from his 1933 inaugural address, in the midst of the Great Depression, would be a useful theme for this weekend’s G7 and G20 meetings in Washington: “The only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance.” Yesterday’s capitulation of the Australian Stock Exchange, which shed 8.3 per cent despite a price-earnings ratio that suggests the market is substantially undervalued, was a measure of the fear gripping investors.

Economic data suggests much of the fear is irrational, based more on contagious sentiment than on the fundamentals of the real economy. Attempting to restore business and investor confidence to protect wider economic activity is the G20’s main challenge. The failure of multi-billion-dollar unilateral interventions by central banks and governments to calm the markets suggest a co-ordinated approach is the only way forward.
Kevin Rudd believes the G20 meeting could be the first concrete political step to resolving the crisis. As the Prime Minister says, there has been a series of “at best, unco-ordinated actions by various national governments on this, and this has not created an overall image of international government consistency”.
Mr Rudd is right. The most important remedial measures to date — widespread interest rate cuts, Washington’s $US700 billion ($1 trillion) rescue package and the 400 billion British bank bailout — have not staunched the market bloodbath. Other disparate measures, such as Iceland’s freezing bank deposits, Britain invoking anti-terror laws to freeze Icelandic assets in the UK, and the failure of the largest EU nations to act in unison, have possibly added to investors’ perceptions of financial chaos. What the world needs from the G20, the G7 and the IMF is firm and resolute leadership that imprints a sense of purpose and direction.
In essence, what is required is quite simple. The central banks need to adopt a united front to take over the counter-party risks of the trading banks. This decisive measure will restore confidence to world financial markets and trust among among the trading banks, ensuring global credit can flow freely. This is what the G20leaders must have the political will to accomplish.
As US Treasury Secretary Henry Paulson said in announcing the meeting: “World economies and financial markets are more connected and interdependent than at any time in history.” For this reason, he said, governments must take care “to ensure our actions are closely co-ordinated and communicated so the action of one country does not come at the expense of others or the stability of the system as a whole”.
Some of the measures the meeting will discuss, Mr Henry said, include providing much-needed liquidity, strengthening financial institutions through the provision of capital and disposing of troubled assets, preventing market abuses, and protecting the savings of citizens. Recent turmoil proves there are no guarantees of success in plunging markets devoid of investor confidence. But such a comprehensive and unified approach, on behalf of 90 per cent of the world’s economy and two-thirds of its population, offers substantial hope. Mr Rudd is right when he says the G20 is the best forum to organise a medium-term and long-term regulatory response to the global crisis.
After years of sustained growth, producing strong returns and creating unprecedented prosperity, a downturn in the world economic cycle was to be expected. However, the indicators suggest that, on paper at least, this should have been no deeper or longer than that experienced in the uncertainty following the terror attacks on the US of September 11, 2001.
New Zealand is already in recession, and Britain is teetering on the edge. While a US recession looks increasingly probable, the world’s largest economy was until recently enjoying growth of 3.3 per cent annually. Bolstered by low interest rates, a weaker greenback earlier this year that assisted exports, and President George W. Bush’s $140 billion stimulus package of tax breaks in January, US growth picked up in the April to June quarter after being sluggish late last year.
In its recent regular assessment of the Australian economy, the IMF predicted economic growth would slow to 2.2 per cent next year. While this would represent a cyclical downturn, it would be far from economic calamity. China, the economic engineroom of Asia, which has been growing in double figures, has moved in conjunction with other nations to shore up its economy with lower interest rates. At worst, its growth rate is expected to slow to about 8 per cent a year, with India expecting 7 per cent growth at worst. Through trade, both will help to cushion Australia.
Freeing up available funds, of which the world still has plenty, not only in the banks but in vast superannuation, pension and insurance funds, is one of the major challenges for the G20 leaders. As economics editor Michael Stutchbury pointed out yesterday: “Crashing share markets hog the headlines, but the more serious damage has been done by the seizing up of the world’s credit markets.” This paralysis, unless unblocked, is the major danger to real economies, because it will increasingly hold back business investment, housing investment and employment.
The US Federal Reserve’s move to lend directly, without security, to US businesses because the US commercial paper market has shut down in the credit freeze, is extraordinary. While apparent recession and growing unemployment are already taking hold in the US, the Federal Reserve’s action is a sign of how vital it is to limit the impact of the financial meltdown on the real economy.
If the meeting provides effective leadership, it will be the first step in rebuilding a sense of normality and stability. It is only in such an environment that investors will base their decisions not on a sense of desperation, but on potential returns and growth. If the meeting succeeds, some might even begin to see the opportunities the current market offers, by turning “retreat into advance”.

Source: The Australian

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US banks to get billions — G7 finance ministers seek new firewall to stem crisis — THE LONG SLOW CRASH OF ‘08

Sat, 11 Oct 2008 23:48:00 +0000

Washington FINANCE ministers and central bank governors from around the world were gathering in Washington overnight to consider further steps to avert global financial meltdown, as the US Treasury draws up plans to shore up American banks with direct cash injections.

US President George W. Bush will host ministers from Britain, Canada, France, Germany, Italy and Japan for economic crisis talks at the White House over the weekend. Energy export powerhouse Russia, which joins the G7 to discuss major international political issues as the G8, would not take part, officials said.
Wayne Swan will be in Washington to take part in a meeting of finance ministers from the broader G20 group of countries, which will be held on the sidelines of the International Monetary Fund and World Bank annual meetings.
“To date, the global solution has been in the hands of the G7 and the G7 does not necessarily include any of the developing countries around the world that are very important to the future of the world economy,” the Treasurer said yesterday.
“So broadening out this discussion to the G20 is really important because the G20, I think, working with the IMF, can help put in place the architecture that is essential to ensure that these events don’t happen again.”
Mr Bush yesterday vowed to take strong action against the crisis and emphasised “our common desire to work with our European friends to develop a best as possible common policy”.
The US President has repeatedly reached out to world leaders in recent weeks in an effort to craft a co-ordinated strategy for confronting what some are calling the worst financial crisis since the Great Depression of the 1930s.
Finance ministers representing G7 nations will also meet central bank chiefs in the US capital today, and US officials said those talks, not the White House gathering, were most likely to yield a breakthrough deal.
As shares fell on both sides of the Atlantic and the Dow Jones industrial average lost more than 7.3 per cent, the increasingly frantic efforts by governments to halt the crisis were highlighted by Washington’s latest emergency moves.
US Treasury Secretary Henry Paulson and senior officials signalled they were actively moving towards taking multi-billion-dollar ownership stakes in stricken US banks, mirroring Britain’s pound stg. 50 billion ($128billion) plan to underpin its banks with direct infusions of capital. Mr Paulson said in a speech on Wednesday that other financial institutions could collapse.
The US Treasury proposal, although in its early stages, marks a rapid rethink by Mr Paulson and the White House after Washington’s $US700billion ($1.06trillion) scheme to buy US banks’ distressed assets, and interest-rate cuts by the Federal Reserve and European central banks failed to banish the fear rocking markets.
Mr Paulson made clear that the rescue law passed by the US Congress, the Troubled Asset Relief Program, gave him power to inject capital into US banks, as well as taking over their distressed holdings of securities.
“We will use all of the tools we’ve been given for maximum effectiveness, including strengthening the capitalisation of financial institutions of every size,” Mr Paulson said before the weekend meetings.
US Government officials later confirmed that a British-style bank recapitalisation scheme was firmly on the agenda.

Author: Gary Duncan The Times, AFP
Source: The Australian

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Treasurer studies chaos on Wall Street — Riding out the financial storm

Sat, 11 Oct 2008 23:47:00 +0000

TREASURER Wayne Swan spent yesterday took an up close look at the the chaos on Wall Street.
Mr Swan met with financial market participants from major Wall Street institutions and will take part in an emergency meeting of finance ministers from the G20 group of leading economies in Washington this weekend.

“In April, we expressed the view at the IMF [International Monetary Fund] that involvement of the G20 is very important,” Mr Swan told ABC Radio yesterday.
“To date, the global solution has been in the hands of the G7 and the G7 does not necessarily include any of the developing countries around the world that are very important to the future of the world economy.
“So, broadening out this discussion to the G20 is really important because the G20, I think, working with the IMF, can help put in place the architecture that is essential to ensure that these events don’t happen again.”

Source: Daily Telegraph

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German Fin Min:G7 Pledge To Systemic-Bks Rescue Far Reaching

Sat, 11 Oct 2008 23:46:19 +0000

WASHINGTON (Dow Jones)—The German government will announce measures to prop up the country’s ailing financial-market sector before markets open Monday, Finance Minister Peer Steinbrueck said Friday.
Speaking after the meeting of the Group of Seven finance ministers and central bank officials in Washington, he repeated that Germany opposes setting up a European fund to bail out the sector as the situation varies greatly in the individual European countries but said that international cooperation is needed.
He declined to give details about the German approach but said Germany would outline its plans at the meeting of euro-zone heads of state and governments Sunday in Paris.
“We will present to the partners of the euro zone what’s crossing our mind in order to generate a coordinated behavior and prevent disparate developments in Europe,” Steinbrueck said. “Under the headline of a cooperated procedure, each country will have search for and find problem-adequate responses.”
Steinbrueck added that Germany would also lay the groundwork for changing accounting rules for institutions by the end of next week.
The G7 comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada.

Author: Andrea Thomas
Source: Dow Jones Capital Markets Report

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US to buy stock in financial institutions

Sat, 11 Oct 2008 00:07:01 +0000

The US government will move ahead with a plan to buy stock in financial institutions, US Treasury Secretary Hank Paulson said.
The move was announced after a meeting of the G7 finance ministers, including UK chancellor Alistair Darling, in Washington.
The programme to purchase stock in the financial institutions will be open to a broad array of institutions, Mr Paulson said.
“As we develop plans to purchase equity… we are working to develop a standardised programme that is open to a broad array of financial institutions,” he said.

Mr Paulson said: “We are developing strategies to use the authority to purchase and insure mortgage assets, and to purchase equity in financial institutions, as deemed necessary to promote financial market stability.”
The US administration received the authority to make direct purchases of stock in banks in the $700bn rescue package which the Congress passed last week.
It would mark the first time the government has taken equity ownership in banks in this manner since a similar programme was employed during the Great Depression.
Mr Paulson said the government’s programme would be designed to complement the efforts of banks to raise fresh capital from private sources.
He said that the government’s stock purchases would be of non-voting shares so that the government will not have power to run the companies.
The purchase of equity stakes in companies would be in addition to the main thrust of the rescue effort, which is to purchase distressed assets off the books of financial institutions in a bid to thaw frozen credit markets and to get banks to resume more normal lending operations.

Source: The Irish Examiner

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Weekend may be a “turning point” for G20-Merrill Lynch

Fri, 10 Oct 2008 23:49:32 +0000

WASHINGTON, Oct 10 (Reuters) — This weekend may signal a turning point for emerging market economies as financial leaders from the world’s richest nations gather in Washington to discuss ways to contain the worst financial crisis since the 1930s, Merrill Lynch economists said on Friday.

“Emerging markets are now the world’s creditors. They have accumulated trillions of dollars in savings in the past couple of years for a rainy day, and guess what, the rainy day is here,” Alex Patelis, chief global economist for Merrill Lynch, said at a news briefing in Washington.
A summit of the G20 emerging market and industrialized nations will take place in Washington on Saturday following a meeting of Group of Seven wealthy nations on Friday.
Leaders from Brazil, Russia, India and China, among others are not only expected to pressure G7 economies to act vigorously to maintain liquidity in global credit markets, but may be in position to provide liquidity, Merrill Lynch said.
“It’s a complete role reversal,” Patelis said.
The G7 nations are the United States, Canada, France, Italy, Germany, Britain and Japan.
Patelis added that despite a recent sell off in emerging market currencies and stock markets, many of those economies are not highly leveraged and don’t have the same reliance on short-term funding that the United States and Europe have.
In addition, emerging market economies led by the BRIC group — Brazil, Russia, India and China — may have accumulated about $9 trillion in foreign reserves, cash and other assets, he said.
“They have these savings stashed away,” Patelis said. “And now the world’s need that money.”

Author: Vivianne Rodrigues,
Source: Reuters

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Tsy Paulson: No G7 Disagreement On 5 Points

Fri, 10 Oct 2008 23:43:49 +0000

WASHINGTON (Dow Jones)—U.S. Treasury Secretary Henry Paulson said Friday that financial market volatility will likely continue for “a while,” but that the Group of Seven’s action plan should restore investor confidence.
“There is every reason for people around the world to be confident,” Paulson said in a briefing following the meeting of the G7 finance officials and central bank governors.
He said some in the press and investor community are “naive” to think different countries could adopt the same policies.
When asked how the G7 plan supports interbank markets, Paulson said different countries have different financial systems, suggesting that the programs will also differ.
But noting that the financial market crisis is “like none of us has ever seen,” he said there were no differences between countries on the G7’s five-point plan.
The G7 laid out an action plan to stop the crisis from spiraling out of control, including taking all necessary steps to “support systemically important financial institutions and prevent their failure.”
The G7 also vowed to “unfreeze” credit and money markets and ensure financial institutions have access to liquidity and funding, and to raise capital from public and private sources. It also plans to make sure each country’s bank deposit insurance programs are robust and consistent. And it said accurate valuation and disclosure of assets, as well as quality accounting standards, are necessary to restart secondary mortgage markets.

Author: Tom Barkley
Source: Dow Jones Capital Markets Report

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G7 vows to fight credit crunch but details sketchy

Fri, 10 Oct 2008 23:42:07 +0000

WASHINGTON, Oct 10 (Reuters) — The world’s rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no collective course of action to avert a deep global recession.

In a surprisingly brief statement following a 3-1/2 hour meeting, the Group of Seven stopped short of backing a British plan to guarantee lending between banks, something many on Wall Street saw as a vital step to end 14 months of turmoil and growing panic on financial markets.
“The G7 agrees today that the current situation calls for urgent and exceptional action,” the United States, Canada, Britain, France, Italy, Germany and Japan said. [ID:nTRS000081]
In a separate statement, U.S. Treasury Secretary Henry Paulson said Washington was developing plans to buy equity stakes in financial institutions as a way to repair balance sheets damaged by huge credit losses. For statement see [ID:nN10412377]; for story, [ID:nN10411342]
The finance leaders agreed to use all available tools to support “systemically important” financial institutions and prevent their failure, and ensure banks can raise capital “in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.”
Analysts said the statement was unlikely to allay the sense of panic that has swept through global markets in recent weeks after Lehman Brothers tumbled into bankruptcy, triggering a wave of risk aversion that left banks hoarding cash.
The Dow Jones industrial average on Friday took a 1,000-point roller-coaster ride before ending down 1.5 percent at 8,451.19 as investors tried to pin down what might come out of the G7 gathering and other meetings of world finance officials in Washington this weekend.
“The markets wanted maybe more assurance that there would be a unified global backstopping of the banks, and it doesn’t sound like that’s in there,” Kim Rupert, managing director of global fixed income analysis at Action Economics, said of the statement from the seven economic powerhouses.
Without credit, economic growth will collapse, and investors were looking to the G7 for a comprehensive plan to get credit flowing smoothly again. Borrowing costs spiked this week even after central banks poured hundreds of billions of dollars into markets and lowered benchmark interest rates in their broadest coordinated action in history.
“Right now, everybody’s scared, they’re panicking,” said Mark Waggoner, president of Excel Futures Inc in Huntington Beach, California. “Unless they see action, they’re still going to panic.
“Part of the problem is no matter what they (G7) do it’s not going to be an instantaneous fix and everybody wants a fix that’s immediate,” he added. “It’s just not going to happen.”
Britain this week committed 50 billion pounds to recapitalize its banks and offered to guarantee interbank lending by as much as 250 billion pounds to get credit flowing again. (For more on that and other proposals, see [ID:nLA698613])
Britain’s Chancellor of the Exchequer, Alistair Darling, had said he hoped other countries would follow Britain’s plan.
FIVE-STEP PLAN
U.S. Treasury’s Paulson said the G7 statement was shorter than the typical communique because the entire group agreed on key points of action and wanted the message to be “different, to the point, and powerful.”
“This is a period like none of us has ever seen before,” Paulson told reporters after the meeting.
He said investors should feel confident knowing that all seven countries had agreed on five key steps — to prevent the failure of important financial firms; unfreeze credit and money markets; ensure that banks have access to liquidity and funding; protect deposits; and restart mortgage markets.
Still, he acknowledged that there would be “some volatility” on financial markets for a while.
French Economy Minister Christine Lagarde said the statement showed that leaders understood the seriousness of the situation and members were ready to act to stem the crisis.
European leaders plan to meet in Paris on Sunday to discuss the crisis. The Group of 20, which also includes reserve-rich emerging economies such as China and Russia, will meet on Saturday.
The G7 members acknowledged they could no longer afford a country-by-country, case-by-case approach to crisis management after 14 months of turmoil, and agreed to stay in close contact to coordinate their actions.
“If nothing of material relevance changes over the weekend as far as the way they are going to confront the credit freeze and pending capital shortages in first tier financial institutions, I think the market will open looking south come Tuesday,” said Enrique Alvarez, head of Latin America debt strategy at IDEAglobal in New York. (For other stories on the G7, IMF and World Bank meetings, see [G7/G8]) (Reporting by Reuters’ G7 team; Writing by Emily Kaiser; Editing by Tim Ahmann)

Author: Mark Felsenthal and Sumeet Desai
Source: Reuters News

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G7 Sees Need For Urgent, Exceptional Action On Crisis

Fri, 10 Oct 2008 23:40:04 +0000

WASHINGTON (Dow Jones)—Agreeing that the global credit crunch requires “urgent and exceptional action,” the Group of Seven leading industrial nations Friday pledged to stabilize markets and prevent systemically-important financial companies from collapse.
Specifically, G7 finance ministers and central bankers agreed to “use all available tools to support systemically important financial institutions and prevent their failure.”

To stem panic in the markets, the officials also said they would work to unfreeze credit and money markets, ensure banks have “broad access” to liquidity and funding and support global economic growth. Measures will be taken in ways to protect taxpayers and avoid damaging other nations, they said.
“The G7 agrees today that the current situation calls for urgent and exceptional action,” the group said in its action plan. “We will strengthen further our cooperation and work with others to accomplish this plan.”
The international commitment to rescuing major banks from failure comes just weeks after U.S. government officials decided against orchestrating a government-backed bailout for Lehman Brothers Holding Inc. Earlier Friday, French Finance Minister Christine Lagarde had said the decision to allow the investment bank to fail aggravated market woes.
The officials agreed that they would prop up financial institutions by ensuring that they can raise capital as needed “in sufficient amounts.” The goal, they said, is to restore confidence and enable banks to continue lending to households and businesses across the globe.
The G7 also pledged to ensure that national deposit insurance and guarantee programs are “robust and consistent” so that customers are confident that their deposits are safe.
Officials also took aim at the secondary markets for mortgages, saying they would work as needed to restart those markets.
They added that accurate valuation, transparent disclosure of assets and consistent implementation of high-quality accounting standards are necessary.
The G7 issued the unified plan of action after the finance officials and central bank governors held a meeting at the Treasury Department in Washington Friday. That meeting as well as others that will continue throughout the weekend came at a critical time: Market panic seems to be spreading around the world, and economists and investors are anxiously looking to international leaders to take decisive coordinated steps to ease the turmoil.
The need for global policy coordination was amplified when Ireland’s plan to guarantee all bank deposits initially prompted fears of deposit flows out of U.K. banks. The British Bankers Association called Ireland’s moves anticompetitive.
This is also a critical time because the market crisis seems to have defied all actions to date. Earlier this week, six central banks announced an unprecedented, coordinated rate cut and the U.K. unveiled a major plan to rescue banks. In another rare move, the U.S. Federal Reserve said it’s working to provide loans to major corporations.
Still, international stock markets have crashed this week and banks remain reluctant to lend to each other. If banks don’t led to each other, credit dries up for households and businesses, which threatens labor markets and potentially slows economic growth.
Meanwhile, leaders of the International Monetary Fund and the World Bank this week have repeatedly called for finance officials to take swift, coordinated action in order to prevent a severe, protracted global recession. On Wednesday, the IMF cut its global forecast for growth for this year and next year, saying the world economy is entering “a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.”

Author: Maya Jackson Randall
Source: Dow Jones Capital Markets Report

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