2-12-08, 7:12 pm
Original Source: China Daily/Agencies
BEIJING, Feb. 12 -- Group of Seven policymakers said the U.S. economy may slow further, eroding global growth, and officials forecast more financial-market turmoil.
'Downside risks still persist, which include further deterioration of the U.S. residential housing markets' and tighter credit conditions, G-7 finance ministers and central bankers said in a statement in Tokyo on Saturday. U.S. Treasury Secretary Henry Paulson said, 'we should expect continued volatility' in markets as risk is repriced.
The G-7 is trying to limit the damage from a housing slump that has pushed the U.S. to the brink of a recession and may consign the world economy to its worst year since 2003. While the statement didn't propose specific measures, European Central Bank President Jean-Claude Trichet said officials would do what's necessary to counter a 'significant market correction.'
'The problems are going right through all parts of the financial markets and there's not much the G-7 can do about this,' said Gilles Moec, an economist at Bank of America Corp in London. 'There's a danger that the downturn will become a self-fulfilling prophecy.'
Some officials signaled they were willing to take steps to promote growth. Bank of Canada Governor Mark Carney, whose term began two week ago, signaled he will lower interest rates. Luxembourg Prime Minister Jean-Claude Juncker, who represents finance ministers from the 15-nation euro region, said some European countries may have room to cut taxes.
More than $6.7 trillion has been wiped from world stock markets since the beginning of the year amid concern that the U.S. slowdown would spread and financial institutions would report more losses.
The rout, which started in August when credit markets seized up, forced central banks in December to move in concert to inject cash into financial markets in the biggest act of international cooperation since the Sept 11 terrorist attacks.
Risks remain 'that further shocks may lead to a prolonged recurrence of the acute liquidity pressures experienced last year', Bank of Italy Governor Mario Draghi said. 'It is likely we face a prolonged adjustment, which could be difficult.'
The Federal Reserve, the Bank of England and Bank of Canada have cut rates this year and the European Central Bank signaled it may lower them.
'We will continue to watch developments closely and will continue to take appropriate actions, individually and collectively, in order to secure stability and growth,' the G-7 statement said.
Risks to growth include tighter credit conditions and heightened inflation expectations, it said.
Some economists say the ability of G-7 policymakers to end the crisis is limited. The group consists of the U.S., the UK, Canada, Italy, France, Germany and Japan.
'This is a credit market problem in the West which has to play itself out,' said Peter Spencer, advisor to the Ernst & Young Item Club and a former UK Treasury official. Aside from rate cuts and tax reductions, 'I don't think there's a lot more that can be done.'
Germany and Japan signaled they have no plans to follow the example of the US government, which approved a package including tax rebates worth $168 billion.
'Each nation should overcome obstacles by taking steps that are the most suitable to them,' Japanese Finance Minister Fukushiro Nukaga said.
The G-7 also pledged to act on the recommendations of the Financial Stability Forum of regulators, which on Saturday proposed measures to prevent a repeat of the credit crisis.
Deutsche Bank AG Chief Executive Josef Ackermann said on Feb. 7 rating downgrades for bond insurers hurt by the subprime slump 'could be a tsunami-like event.'
Italy's Draghi, who drafted the report, said banks should publish more information about their losses and improve risk management.
The report also said authorities must address 'potential conflicts of interest' at credit-rating companies and improve understanding of banks' off-balance sheet positions, according to the statement.
From China Daily/Agencies
