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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2908

G7 to Boost Private Sector Further

By Dr.Abdul Ruff Colachal

Finance ministers and central bankers from G7 rich nations, comprising the United States, Britain, Canada, France, Germany, Italy and Japan, met on 11 April to bless proposals for tightening scrutiny of global banking practices and to press the private sector to step up its efforts to settle financial markets. Recent economic crisis in USA and else-where has sent a danger signal to the Western strong economic world about a possible long-term financial turmoil. Group of Seven finance chiefs reviewed a hefty set of recommendations from a blue-ribbon study group, the Financial Stability Forum (FSF), for calming the markets’ crisis that has rippled across the globe since last summer and may eventually cost as much as $1 trillion in losses.

The eight-month-old crisis, which originated in a meltdown of U.S. sub-prime mortgage markets, ricocheted through the global economy as securities cobbled together on Wall Street from bits and pieces of mortgage loans turned sour.

It has now has cast a pall over global economic prospects. The International Monetary Fund (IMF) said last week it expected the United States to topple into a "mild recession" this year and estimated a 25 percent chance the global economy will grow by 3 percent or less, which would be considered recessionary. Banks have already written down roughly $225 billion in assets tied to souring mortgages and other loans in 2007 and the first quarter of 2008, according to German Finance Minister Peer Steinbrueck, who dismissed as far-fetched estimates that losses could eventually reach $1 trillion.

In a nod to European leaders who had voiced dismay over volatile foreign exchange markets that pushed the euro to new highs against the U.S. dollar, the G7 also strengthened its call for calm in currency markets. "Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability," the communiqué stated. "We continue to monitor exchange markets closely, and cooperate as appropriate."

The outlines of the FSF's recommendations, numbering about 65 recommendations, are: fuller disclosure of risks by banks, more rigid standards for credit rating agencies, measures by central banks to ensure they can effectively pump cash into the system at times of stress. Indications are that most G7 members have already accepted the proposals, including measures to improve risk management so banks aren't caught short of cash as occurred this year when credit markets seized up. A G7 communiqué was issued following the summit. The recommendations, amended somewhat, were adopted by the ministers and central bankers. The next step will be to push bankers to match the vigor of the efforts that global central banks have shown in battling the liquidity squeeze by urging these private-sector players to quickly put their losses behind them and resume lending.

The G7 said it strongly endorsed the report from the Financial Stability Forum, which comprises central bankers and global regulators. The report calls for tougher capital requirements for banks to ensure they can withstand periods of financial market stress, and urges closer international cooperation between central banks and regulators. Federal Reserve Chairman Ben Bernanke emphasized that there was urgency about putting reforms in place to restore confidence. The U.S. central bank has pumped about $400 billion of liquidity into markets and other global central banks also have poured in cash to boost banks' willingness to lend. "We do not have the luxury of waiting for markets to stabilize before we think about the future," Bernanke said.

U.S. Treasury Secretary Henry Paulson spoke to a select group of bankers invited for dinner on 10 April and clearly stated his position that he wanted banks to be ready to play their role as a market stabilizer. "If you think you're going to need capital, don't be looking for the government to help you, if you think you need capital, go raise it." Paulson said after addressing the Council of Institutional Investors. When asked about the thinking behind the changes in the statement, European Central Bank President Jean-Claude Trichet replied, "It's like a poem, it speaks for itself."

Currency Issue: Falling US Dollar

The tussle between the US dollar and Euro remains the cause of irritations among the G7 members. While the focus is clearly on financial-system reform, G7 ministers want to send a message that the global economy is not about to run off the rails and might tweak communiqué language on currencies in response to European concerns that the euro has reached new heights against the dollar. "I deplore the excessive volatility of exchange rates," European Central Bank President Jean-Claude Trichet said after the euro hit a record peak of $1.5912.

There is no time better than the present to recognize the dollar’s weakness. Over the past 30 years, G7 meetings have marked big turning points for the US dollar, they have the potential to make or break the US dollar. Following the Dubai meeting in 2003, the Group of Seven called for more “flexibility in exchange rates.” Although this criticism was directed at China and Japan, it came on the heels of a strong dollar rally. The decline of the US dollar during the late 1980s was also halted when the Louvre Accord was signed in 1987 at the G7 Minister of Finance meeting.

The weaker dollar has helped to boost exports and provides another avenue for the US government to stimulate the otherwise ailing economy. The US government continues to pay only lip service to the strong dollar policy because they know that the path to a stronger dollar is through a weaker one. To date, the US has been reluctant to take any measures to address the dollar’s decline. The members of the Eurozone that are apart of the G7 (France, Germany and Italy) are not expected to officially call for dollar strength either.

Japan and its Asian neighbors have been the hardest hit by the dollar’s weakness. According to government data, inflation in Japan reached a 10 year high during the month of February. Even China, who has received significant criticism about their artificially weak currency, is now expressing concern about the falling dollar’s impact on the value of their foreign exchange reserves. However Japan and its Asian neighbors alone will not be able to convince the G7 to directly address the weakness of the US dollar.

With the dollar breaching the 7 Yuan mark, China has already made great inroads to strengthening its currency. Since the beginning of the year, the Yuan has appreciated 4.5 percent, compared to 7 percent growth in 2007. This gives the G7 little room to further criticize China because the problem in the world right now is not Yuan weakness but dollar weakness. Past communiqués have encouraged China to speed up appreciation of its yuan currency, and the pace of the currency's rise has picked up. It crossed 7.00 to the U.S. dollar last week for the first time in more than a decade. The G7 seeks to give a nod to the increased pace of appreciation, which is considered vital to help reduce global economic imbalances, but likely will also urge Beijing to keep the process going.

Both G7 and G8 (includes Russia) consider the long-term economic prospects of the United States. However, the housing correction, together with high energy prices and financial market turmoil, are weighing on U.S. economic growth. Given the significant short-term downside risks, we are taking action. The economic stimulus package passed in February will provide over $150 billion of individual and business tax relief in 2008, leading to the creation of over half a million additional jobs by the end of the year. The Administration has taken a number of steps specifically designed to minimize the spillover from the housing sector to the real economy, such as convening the HOPE NOW alliance and implementing the FHASecure program.

The financial market turmoil and its impact on global growth underscore the need for all countries to remain open to trade and investment. I reiterated the United States' commitment to open investment policies and to combating rising protectionism. Protectionist pressures threaten to deprive countries of the significant benefits generated by foreign investment. USA supports the work of the IMF to develop best practices for sovereign wealth funds (SWFs) and look forward to a final set of best practices by the IMF Annual Meetings in October. I. US support the continued cooperation of the IMF and World Bank with the FATF to combat money laundering and terrorist financing worldwide.

An Observation

G7 members, notably the United States and Canada, want to push bankers to match the vigor that global central banks have shown in battling the liquidity squeeze by urging these private-sector players to quickly put losses behind them and raise new capital. On the eve of gathering, Bank of Japan Governor Masaaki Shirakawa said the G7 countries "need to show a clear determination towards stabilizing the financial system."

Central banks have flooded markets with cash to try to spark lending, and the U.S. Federal Reserve and other central banks have cut interest rates to try to keep economies afloat. That marked the first shift in four years from the G7's boilerplate language on currencies, and provided a verbal caution to markets that world finance leaders were keeping a close watch on currency moves.

The main focus of the meetings, therefore, was a special study commissioned by the G7 that offered a detailed assessment of the banking and regulatory failures that contributed to an eight-month-long and ongoing bout of market turmoil. The report offered dozens of recommendations on how to shore up banking oversight and regulatory cooperation to prevent a recurrence.

Advancement of privatization has been on the agenda of G7 right from its inception in 1976. (Russia formally joined the group in 1997, resulting in the Group of Eight (G8). The G7 will review an update on the implementation of the Financial Stability Forum (FSF) policy recommendations at its October Ministerial. Meanwhile all out efforts would be undertaken to boost private sector world wide.That would essentially mean G7 would take steps to further squeeze public sector undertakings especially in minor economies to promote private sector directly and through various financial bodies like World bank and IMF. The move by G7 to promote the leadership of pro-capitalist economists would be kept in tact and further strengthened.

- Asian Tribune -

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