Feb. 14 (Bloomberg) -- Group of Seven finance chiefs vowed to tackle a “severe” economic downturn that will persist for most of 2009 without spelling out new steps to do so.
The G-7’s finance ministers and central bankers said in a statement released after talks in Rome today that they were working to restore confidence to markets and growth to the world economy. They predicted the full effect of individual rescue packages would “build over time.”
“We reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector,” the statement said. “The stabilization of the global economy and financial markets remains our highest priority.”
The policy makers met after reports yesterday showed Germany’s economy contracted the most in 22 years in the fourth quarter and U.S. consumer confidence neared its lowest since 1981. With the worst global slump since World War II battering state finances, International Monetary Fund Managing Director Dominique Strauss-Kahn said he expects more countries to need emergency aid.
That’s putting governments and central banks under greater pressure to end the malaise and U.S. Treasury Secretary Timothy Geithner demanded “exceptional measures” from his counterparts.
At a Loss
The authorities are still at a loss on the best course of action 18 months after the credit crisis broke out. That’s left them pursuing a disjointed approach with stimulus efforts and bank rescue plans varying across borders.
“The statement ticks all the right boxes, but as expected does not go beyond generic statements of principle and commitments that we have heard before,” said Marco Annunziata, chief economist at Unicredit MIB in London. “The commitment to act in a coordinated way flies in the face of the rather uncoordinated approach that followed similar commitments last October.”
While Geithner pressured colleagues to take more action to kick-start the global economy, German, French and Canadian officials raised questions about his new strategy, which commits up to $2 trillion to reviving lending and tackling toxic assets.
Canadian Finance Minister Jim Flaherty said in Rome the proposals are “less than clear,” echoing comments by Germany’s Peer Steinbrueck. French counterpart Christine Lagarde said she wants Geithner to “clarify the modalities, the calendar, the way he’s going to implement his plan.”
‘Less Than Clear’
Investors complain Geithner hasn’t fully outlined whether banks saddled with illiquid debt will be forced to fail, how tainted assets will be removed from their balance sheets and what will be done to stop falling house prices. Geithner’s response is that he won’t rush his flagship policy and risk making a hash of it. U.S. stocks fell the most this week since November.
The G-7 earlier called the steps its members have taken to fight the turmoil “exceptional,” noting they ranged from spurring liquidity in markets and bolstering capital in banks to slashing interest rates and easing fiscal policy.
Amid signs some are attempting to shield domestic companies and workers from the fallout, the G-7 said it “remains committed to avoiding protectionist measures, which risks exacerbating the downturn.” A package of tax cuts and spending increases passed late yesterday by the U.S. Congress encourages companies to “Buy American,” while France is demanding carmakers keep production at home in return for aid.
Yuan Gains
The G-7 officials tempered past criticisms of Chinese currency policy, saying they welcomed the country’s bid to invigorate its economy. The nation’s commitment to a more flexible yuan should lead “to continued appreciation” in the exchange rate. Geithner last month accused China of “manipulating” its currency.
“The G-7 has realised that China needs to be brought into the fold of the global financial system rather than be treated as a pariah just because of yuan inflexibility,” said Geoffrey Yu, a London-based foreign-exchange strategist at UBS AG in London. “This statement will be welcomed in Beijing and help defuse the recent tension between China and the U.S.”
The group repeated its traditional message that “excessive volatility” and “disorderly movements” in exchange rates must be avoided.
The omission of any G-7 currency from the communiqué meant “there’s likely to be only a muted reaction” in markets, said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey.
‘Second Wave’
As he predicted a “second wave” of countries seeking assistance, the IMF’s Strauss-Kahn signed a deal with Japan to give the lender access to an extra $100 billion after it issued loans from Iceland to Pakistan to Hungary.
The G-7 officials also probed ways of strengthening oversight of markets before they convene next month in the U.K. with colleagues from the broader Group of 20 nations. The scope of regulation, compensation packages and risk management are all under review, their statement said.
The G-7 oversees about two-thirds of the world economy and is composed of the U.S., Japan, Germany, U.K., Italy, Canada and France.
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