Credit and Market Turmoil Top G7 Agenda
Oct 19 02:54 PM US/EasternBy JEANNINE AVERSAAP Economics Writer
WASHINGTON (AP) - Curbing fallout in the global economy from a credit crisis that panicked investors worldwide is the dominant topic as finance officials from top economic powers meet.
Risks to the global economy have intensified since finance officials from the Group of Seven countries last gathered here in April.
The housing slump in the United States has deepened. Problem mortgages have multiplied. Credit has dried up for risky and some not-so-risky borrowers. The spreading troubles unhinged Wall Street in the late summer and sent stocks worldwide into a tailspin.
Things have calmed down since, but the financial situation remains fragile. It will take time for markets to fully stabilize.
Given the delicate state, there are worries that more bad news on these fronts could easily push edgy investors into another bout of panic and spook both businesses and individuals, whose spending and investment are critical to the world's economic health.
Also complicating the global outlook: surging oil prices, which topped $90 a barrel, a new high, in trading Friday in the United States.
All these concerns will be front and center when Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke meet with their financial counterparts Friday afternoon. Besides, the United States, the other members of the G7 are Japan, Germany, France, Britain, Italy and Canada.
Finance officials will seek to strike a confident tone in a statement Friday evening as they assert they are closely monitoring the situation and will take whatever action they can to minimize damage to the global economy. They'll also seek to learn the causes and lessons from the debacle.
The globalization of the financial markets—credited with giving investors more choices—has also spurred an array of complex investment instruments flowing across international borders. The meltdown in the United States with risky subprime mortgages made to borrowers with spotty credit or low incomes also ended up hurting investors in Europe and elsewhere. Banks, hedge funds and others that invested in subprime mortgage-backed securities suffered big losses.
Against this backdrop, finance ministers also are expected to discuss the adequacy of financial regulations.
Europeans—notably German Chancellor Angela Merkel and French President Nicolas Sarkozy—support more regulatory oversight. The United States, however, favors a more market-oriented approach. Paulson, for instance, recently announced two panels to explore voluntary "best practices" for hedge funds, which are largely unregulated by the government.
"While a small number of hedge funds were forced to wind down in recent months, there were no systemic events associated with their closure, and hedge funds have not proven to be a significant problem," Paulson said.
Still, Paulson suggested the forces behind the recent turmoil need to be better understood. He has asked the Financial Stability Forum—under the leadership of Bank of Italy Governor Mario Draghi—to form a group to look at the underlying causes of the recent market turbulence.
The group will be asked to offer proposals in several areas, including risk management, accounting and valuation of sophisticated financial instruments called derivatives and the role of credit rating agencies in the debacle.
Draghi will talk to finance ministers about this effort, but his panel's final report isn't expected until April 2008.
Another issue likely to crop up during Friday's discussions is the big drop in the U.S. dollar, which has hit a record low against the euro.
Europe is beginning to feel the pinch of that sharp decline. It is making French wine, Italian fashion and German cars more expensive purchases in the United States, which is the European Union's main export market. The weaker dollar, however, is good for U.S. companies because it makes their products less expensive to European buyers.
Another currency matter expected to be discussed: ongoing efforts by the United States and its G7 colleagues to prod China to let its currency, the yuan, rise in value. That would raise the price of Chinese goods on world markets. China's undervalued currency is blamed for contributing to the United States' swollen trade deficits and the loss of millions of U.S. factory jobs.
The growing role of "sovereign wealth funds"—secretive government- controlled investment funds—in the global economy also will be scrutinized.
At the G7 dinner on Friday evening, finance officials will look into these funds, estimated to be worth some $2.5 trillion, and whether more information should be made public about their holdings. Officials from China, South Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore and the United Arab Emirates—all of which operate such funds—have been invited to take part in the dinner discussion.
On another matter, Paulson will raise a proposal to set up an international clean technology fund, which President Bush mentioned several weeks ago. Such a fund would promote clean energy projects in the developing world by financing the transition from traditional to more expensive clean-energy technology.
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