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G7 finance ministers from Japan, US, UK, France, Italy, Germany and Canada and central bank governors pose for a group photo in Tokyo, Feb. 9, 2008. At back row, the four on right were Mervyn King, Governor of the Bank of England, Ben Bernanke, Chairman of the US Federal Reserve, Jean-Claude Trichet, President of the European Central Bank, and Dominique Strauss-Kahn, Managing Director of the International Monetary Fund. |
Group of Seven policy makers said in Tokyo at the week-end that the US economy may slow further, impacting global growth. German Finance Minister Peer Steinbrück, said the G7 now feared that write-offs of losses on securities linked to US subprime mortgages could reach $400bn.
``Downside risks still persist, which include further deterioration of the US residential housing markets'' and tighter credit conditions, G-7 finance ministers and central bankers said in a statement in Tokyo. U.S. Treasury Secretary Henry Paulson said ``we should expect continued volatility'' in markets as risk is repriced.
The G7 said that: "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 US 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."
German Finance Minister Peer Steinbrück said financial institutions around the world face $400 billion of write-offs as a consequence of the US subprime mortgage crisis.
Steinbrück said the crisis that spread from the US property market to global financial markets may continue well into 2008. Banks should provide ``prompt and full disclosure'' of losses. He welcomed proposals by the Financial Stability Forum, an international group of market regulators.
There is a risk of further write-offs related to U.S. credit card financing and car loans, Steinbrück told reporters during the G7 meeting of finance ministers and central bank governors.
Banks and securities firms have already made about $146 billion in losses since the beginning of 2007, mainly due to their exposure to structured investments such as collateralized debt obligations backed by mortgages.
“The next 10 days to two weeks will be crucial because we are going to have the first audited accounts [from financial institutions] since the crisis started,” added Mario Draghi, Governor of the Bank of Italy and chair of the Financial Stability Forum.
Draghi said regulators were ready to force banks to reveal their losses and replenish their equity ratios. He did not rule out the possibility that governments might eventually need to inject capital into banks, although he stressed that market solutions should take precedence.
US Treasury Secretary Paulson said he believed the US stood a good chance of avoiding recession. “I believe that we are going to keep growing. If you are growing, you are not in recession, right?”
He said the G7 discussion focused on “how we minimise the spillover that is going on in the capital markets into the broader economy”.
Paulson also said he was not disappointed that Japan and European countries had rejected the proposal made by Dominique Strauss-Kahn, International Monetary Fund Managing Director, for joint efforts to stimulate their economies by fiscal packages. He suggested that other countries would not escape a US downturn, describing decoupling as a “myth”.
