Markets to give final verdict on world’s show of unityOctober 13th, 2008 - 11:19 am ICT by IANS
Washington, Oct 13 (DPA) While the world’s top economies stressed their resolve to do everything it takes to solve the worst financial crisis since the Great Depression, the world’s stock markets will have the final say on just how clear a message was delivered.It was a weekend of heavy promises and calls for joint action. First, the world’s seven leading economies - those at the epicentre of the current financial turmoil - Friday vowed to use “all available tools” to stabilize their financial markets.
In a one-page statement, one of the shortest in recent memory, the G7 offered five clear principles to shore up their banking sectors threatened with collapse.
They included a promise to prevent the failure of “systemically important” financial institutions and to use public funds to help banks raise enough capital to “re-establish confidence.”
On Saturday, finance ministers from the wider world offered their full backing. The International Monetary Fund’s 185 members “strongly endorsed” the G7’s action plan.
The Group of 20 - a wider bloc that includes budding economies China, India and Brazil - lent their support and committed to using “all the economic and financial tools” of their own to keep the financial sector running smoothly.
IMF Managing Director Dominique Strauss-Kahn said the clear commitments would help unblock credit markets and predicted investors’ reaction would be positive.
“In the coming days, what I expect is that the reaction by the different (financial) institutions will be positive enough to unfreeze the credit market and to restore the necessary funding,” Strauss-Kahn said.
All countries have a stake. The IMF in its semi-annual economic survey last week put the world on the brink of recession. Growth was forecast to slow to 3.9 percent this year and three percent in 2009. The IMF considers growth of under three per cent a recession.
Global stocks have plummeted. Japan’s Nikkei Index lost 24 percent last week and Germany’s DAX more than one-fifth. On Wall Street, the Dow Jones Industrial Average lost 18 per cent for its sharpest one-week point drop in history.
Meanwhile finance ministers from developing countries, already dealing with food and fuel price surges, chronicled how exports were slowing and investment in their own countries was beginning to dry up. They urged wealth nations not to ease up on their aid commitments.
“We are now facing a world crisis,” warned Brazilian Finance Minister Guido Mantega, who chairs the G20.
But despite the agreements that joint action was needed, the statements over the weekend were short on specifics.
The G7 - made up of the United States, Canada, Britain, France, Italy, Germany and Japan - announced none of the new moves that some investors had been hoping for, such as a British plan to guarantee inter-bank lending.
“Unless the G7, separately and jointly, act more decisively, I’m afraid that next week could be quite difficult,” wrote Simon Johnson, a former chief IMF economist, on his website baselinescenario.com.
As markets prepared to deliver their verdict, some finance ministers lamented what they viewed as unnecessary fear on the part of investors.
Mantegna called the markets “irrational.” US Treasury Secretary Henry Paulson said investors were “naive” if they expected advanced economies to come up with the same set of policies for countries with wildly different financial, economic, political and legal systems.
Yet even the IMF’s current chief economist sounded bleak: Olivier Blanchard told Italian daily Corriere della Sera that stocks may fall another 20 percent before bottoming out.
Tags: available tools, credit markets, different financial institutions, dominique strauss kahn, finance ministers, financial turmoil, global stocks, great depression, international monetary fund, nikkei index