7:00AM New York, 9:00PM Tokyo - G7 nations discuss world economy and financial markets and took a dimmer view of the current world economic growth since the last meeting four months ago.
The G7, the group of the seven wealthiest nations, finance ministers and central bankers met in Tokyo, Japan to discuss current issues facing the world economy but failed to agree on several important topics.
The ministers appear to run out of options to rekindle the economic growth as they largely focused on problems and concerns related to their domestic economies.
The meeting of ministers ended up discussing the ongoing U.S. housing markets that has quickly developed into a global banking crisis. The ministers in the accompanying statement acknowledged that the world economic growth is likely to slowdown and emerging markets are likely to continue to grow but at a slower pace, urged China to revalue its currency and asked banks to be more transparent with their current financial difficulties.
The tone of the statement, since last statement issued on October 19, 2007, has changed considerably and takes a dimmer view of the world economy but appears to show a rift among ministers and bankers.
Europeans are worried about the rising strength of their currency euro and a potential decline in exports, Japan is worried about its exports to the U.S. and has a national debt of 150% of its gross domestic product, and the U.S. appears to be less concerned about its large and rising current account deficit. While the ministers discussed the linkages in the financial markets among nations and a need to lower tariffs by the developing nations, there appeared to be no discussion on the lax regulatory environment in the U.S. financial and banking system and persistent, large, and growing U.S. current account deficit.
The ministers also discussed the need for greater transparency in the sovereign wealth funds, which are expected to grow from $3 trillion in 2007 to $12 by 2010. However, the ministers failed to tackle the need for these funds to find appropriate returns. The rising U.S. current account deficit driven largely by the wasteful spending from the U.S. government and voracious appetite of the U.S. consumers to spend beyond their financial means is one of the largest contributors to excess money floating in the world financial system.
The members urged China, for the second time in four months, to revalue its currency but did not tackle the root cause of the current imbalances in the global financial systems. The statement, which is short on specifics, urged China, Japan, and developing nations to rely less on exports and develop their local economies. The U.S. current account and trade deficits are likely to persist even if China revalues its currency against the U.S. dollar by more than 50%.
The member nations urged oil producing countries to increase oil output and urged to build more refineries and use better technologies to process hydrocarbon fuels.
On only one issue there appeared to be an agreement that banks must rebuild their balance sheets and must be encouraged to be transparent in declaring their losses from the leveraged and risky housing loans. German Finance Minister Peer Steinbruck said during a press conference after the meeting that there appeared to be no disagreement among members that the sub-prime related losses may reach $400 billion.
Henry M. Paulson Jr., The United States Treasury Secretary, in a press conference said that the current financial markets turmoil may continue for a while but he appeared confident that the fundamentals of the U.S. economy are sound. He did not elaborate how long the current malaise in the capital markets will last or why the U.S. has failed to tackle the lax sub-prime lending rules and weak regulatory oversight, the root cause of the global financial markets turmoil.
The following is an unedited statement released after the G7 meeting.
Statement of G-7 Finance Ministers and Central Bank Governors
Tokyo, Japan
February 9, 2008
We, Finance Ministers and Central Bank Governors of the G-7 countries, met today to discuss issues facing the world economy.
The world confronts a more challenging and uncertain environment than when we met in last October, though its fundamentals as a whole remain solid. In the United States, output and employment growth have slowed considerably and risks have become more skewed to the downside, but long-term fundamentals remain sound and we expect growth to continue in 2008. In all our economies, to varying degrees, growth is expected to slow somewhat in the short-term, reflecting wider global economic and financial developments. Emerging market economies (EMEs) are forecast to continue robust, if slower, growth. We note that downside risks still persist, which include further deterioration of the U.S. residential housing markets; tighter credit conditions from prolonged difficulties in the financial markets; high oil and commodity prices; and heightened inflation expectations in some countries. Each of us has taken actions, appropriate to our domestic circumstances, in the areas of liquidity provision, monetary policy, and fiscal policy. We also remain committed to strengthening our efforts to enhance growth through necessary reforms. Going forward, we will continue to watch developments closely and will continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies.
We are deeply engaged in working together to strengthen financial stability, limit the impact of the financial turmoil and address the factors that contributed to it. Co-ordinated liquidity provision by Central Banks has helped mitigate short-term pressures in the money markets. Financial institutionsf recognition and full and prompt disclosure of their losses, based on appropriate valuation, accompanied, where necessary, by measures to reinforce their capital base, play an important role in reducing uncertainty, improving confidence, and restoring the normal functioning of the markets. We urge this process to continue. Authorities should encourage market-led improvements in transparency and disclosure practices in this area, and, where needed, provide clear and consistent guidance.
In October, we asked the Financial Stability Forum (FSF) to analyse the underlying causes of the recent turbulence and put forward relevant actions and initiatives in a number of areas. We welcome its interim report and the good progress that has been made, and look forward to its final report in April. We will act expeditiously on its recommendations. Among the issues that have to be addressed, we emphasise, in particular, i) the importance of promoting prompt and full disclosure by financial institutions of their losses and of valuation of structured products; ii) strengthening management of liquidity risks at financial institutions by accelerating the development of an internationally consistent approach by the Basel Committee on Banking Supervision; iii) improving the understanding and disclosure of banksf and other financial institutionsf exposure to off-balance sheet vehicles; iv) enhancing underpinnings of the originate-to-distribute model by ensuring an appropriate incentive structure comes into play; v) addressing potential conflicts of interest at credit rating agencies, and improving the information content of ratings to increase investorsf awareness of the risks associated with structured products; and vi) implementing the Basel II capital adequacy framework to enhance transparency and risk management. In addition, authorities should review, as necessary, their mandates, coordination mechanisms, and instruments to ensure measured and flexible responses to market stress, including arrangements for dealing with weak and failing financial institutions, both domestically and cross-border. We ask the IMF and the FSF to report at our next meeting on identifying potential vulnerabilities and enhancing early warning capabilities.
We stand ready to take any further action necessary to enhance stability in the financial market and to ensure that international integration of financial markets and financial innovation continue to bring about benefits to the world economy. |
