G7 to stem meltdown
2008-10-11 09:32
Washington/New York - Finance chiefs of
the world's rich nations pledged on Friday to prevent big banks
from collapse and to work together to stem the financial crisis
after another day of gut-wrenching drops on world markets.
"The current situation calls for urgent and exceptional
action," finance ministers and central bankers of the Group of
Seven major industrialised nations said following their meeting
in Washington. They pledged to use "all available tools", but
did not announce specific measures.
Reeling from the loss of trillions of dollars of wealth,
investors worldwide had pinned their hopes on decisive action
from the G7. US stocks pared massive losses in a late
recovery after a day of sharp moves.
And US Treasury Secretary Henry Paulson, warning that the
United States was facing a prolonged period of uncertainty,
said Washington was developing plans to purchase equity stakes
in financial institutions.
Japan's finance minister also said that Japan was
considering injecting capital into banks.
Such moves would be similar to measures that Britain has
announced to put money into struggling banks.
The G7, meanwhile, said it would work to get financing
flowing.
"We commit to continue working together to stabilise
financial markets and restore the flow of credit, to support
global economic growth," officials of the G7, which includes
the United States, Canada, Britain, France, Italy, Germany and
Japan, said in a statement.
'The markets wanted maybe more assurance'
They said that would include using all available tools to
prevent "systemically important" financial institutions from
failure and to ensure that banks can raise capital from public
and private sources.
The G7 stopped short of backing a British plan to guarantee
lending between banks, something many on Wall Street saw as a
vital step to end 14 months of turmoil and rising panic over
recent weeks.
"The markets wanted maybe more assurance that there would
be a unified global backstopping of the banks, and it doesn't
sound like that's in there," said Kim Rupert, managing director
of global fixed income analysis at Action Economics LLC in San
Francisco. "This week has been absolutely brutal. ... If this is
the extent of it from G7, then we could be in for more trouble
on Monday."
Enrique Alvarez, head of Latin America debt strategy at
Ideaglobal in New York, said he was disappointed.
"I think they had to come with a much stronger commitment
in order to tackle the freeze in the credit market and the
absolute lack of confidence in the G7 government leadership by
the markets, equities in particular," he said.
Concerted interest-rate cuts by major central banks around
the world, individual liquidity injections, and a $700bn
US bailout plan have so far failed to restore confidence.
Leaders of euro zone countries will meet in Paris on Sunday
in a new European attempt to co-ordinate action. The Group of
20, which also includes reserve-rich emerging economies such as
China and Russia, will meet on Saturday.
US stocks crawled back from massive losses in the final
hour of trade, with the Dow closing down about 1.5% on a
day in which it traded in a 1 000-point range. The eighth
straight day of losses left the Dow down 18% for the
week.
World markets reel
US stocks have lost $2.4 trillion this week and $8.4
trillion in the past year, according to the Dow Jones Wilshire
5000.
The rally only partially resurrected the shares of Morgan
Stanley and Goldman Sachs, pummelled when credit rating agency
Moody's Investors Service said it might cut their ratings,
reviving concerns about the viability of their banking models.
Both Morgan Stanley and Goldman Sachs last month converted to
become bank holding companies.
Asked about the two banks, Paulson said the G7 officials
had not discussed specific institutions at their meeting.
Investors have been fretting that Mitsubishi UFJ Financial
Group Inc, Japan's largest bank, could seek to renegotiate the
terms of a planned nine billion dollar cash injection into Morgan Stanley.
Morgan Stanley's share price has fallen some 70%
over the last week and potential ratings cuts are looming,
spurring many to make comparisons to Lehman Brothers Holdings
Inc's final days. But analysts and a person close to Morgan
Stanley said letting the bank fail was not really an option.
"You can't possibly allow Morgan Stanley to go. The
unrelenting pessimism and absence of confidence that we've seen
for the last two weeks would get worse," said Michael Holland,
who oversees more than four billion dollars of assets at Holland & Co LLC in New York.
Scrambling for safety, investors have pulled a net $43.3bn
from US mutual funds investing in equities so far in
October, while pouring nearly $60bn into money-market
mutual funds.
European shares had their worst week ever, with the
pan-European FTSEuroFirst 300 index down 22% in the week
after closing down 7.6%. The FTSEurofirst 300 closed at
851.23 points, its lowest close since July 2, 2003.
Glimmer of hope
"It's total panic. People are so scared that they are
looking to liquidate everything that has cash value and to stay
away from everything," said Bruce Dunn, vice president of
trading at New Jersey-based Auramet Trading.
In one glimmer of hope, there were signs of the start of a
thaw in the credit markets. Interest rates on US overnight
commercial paper dropped after overnight dollar and euro rates
fell closer to central banks' new lower targets.
Consumers also stood to benefit from lower oil and
commodities prices. US benchmark crude fell almost 10%
to around $78 per barrel. US corn and soy futures fell about
seven percent each.
The US dollar surged as investors scrambled for cash in
the world's reserve currency.
Emerging market assets fell to multi-year lows and a
handful of emerging market bourses stayed shut on Friday rather
than risk further declines.
Russia raised bank deposit guarantees as its banking crisis
deepened, with one bank's licence revoked and another asking
clients to repay mortgages.
Russia on Friday also said it would stump up cash to
support battered stock prices, launching an aid package worth
around five percent of the value of Russia's traded shares.
Iceland, among the most dramatic casualties of the crisis,
sought to reassure international investors, saying it would
honour its obligations.
Many investors have been looking for global leadership, but
US President George W Bush is a lame duck ahead of the November
4 election. Democratic nominee Barack Obama said the crisis
required co-ordinated international action, and Republican John
McCain argued his experience made him the candidate who can
lead at a time of economic tumult.