WASHINGTON: In the face of a financial firestorm growing out of control by the day, finance chiefs from the Group of Seven nations meet in Washington on Friday in desperate straits for an answer.
Financial authorities in the major powers have already pumped massive amounts of liquidity into the global banking system in an effort to unclog credit markets and joined in a coordinated cut in interest rates.
But panic is still gripping markets, which have hit multiyear lows in the United States and most other countries amid an extraordinary loss of confidence.
The G7 meeting will bring together finance ministers and central bankers of the United States, Germany, Japan, France, Britain, Italy and Canada.
US President George W. Bush agreed to host finance ministers from the G7 on Saturday. Bush vowed to take "strong action" against the crisis and emphasized "our common desire to work with our European friends to develop a best-as-possible common policy.
Marc Chandler, analyst at Brown Brothers Harriman, said despite the grim outlook, the G7 still has some options to help calm the storm.
"We are hesitant to spread rumors, but there is increasing speculation that the G7 meeting could take another major step and that is to guarantee all interbank lending," he said.
"This talk is having a demonstrable impact on the interest rate markets. It is difficult to evaluate the likelihood, but it is important to note that officials generally recognize that current measures are not yet sufficient to turn the corner of the crisis.
Chandler said such a move "would seem to be an effective way of easing the crisis in the money markets, which is spilling over and hurting innocent bystanders, like corporations and exacerbating the downside risks to the economy.
John Ryding, an economist at RDQ Economics, said the move by Britain to inject capital into troubled banks offered a "glimmer of hope," especially after Washington said it would consider similar actions.
"It will require the G7 finance ministers on Friday to see the actions that need to be taken but the pieces of the puzzle to the solution of the financial crisis will be in front of the finance ministers when they meet in Washington," Ryding said.
"For this, we have to thank the UK Prime Minister Gordon Brown and his Chancellor of the Exchequer Alistair Darling. Our hats are off to them and, if Treasury Secretary Henry Paulson follows their advice, we could finally have found our wider firebreak.
But in a sign that unity was weak, the head of the International Monetary Fund, Dominique Strauss-Kahn, said that European Union countries should work together and avoid unilateral steps to fight a global financial crisis.
"Cooperation and coordination in actions is the price of success. All kinds of cooperation have to be recommended," Strauss-Kahn said at a news conference ahead of the annual meetings this weekend of the IMF and World Bank. Unilateral action "has to be avoided, if not condemned," he said.
BNP Paribas analysts said there were positive signs. "Signs of hope are finally emerging that a globally coordinated approach to the financial crisis could be agreed between policy makers at Friday's G7 meeting," they wrote in a research note.
"Indeed, the UK's three-pronged approach to the crisis announced Wednesday has been gaining praise, and there are also suggestions that the US could adopt similar measures.
"Speculation that a coordinated approach could be close has been heightened by reports that Bush has called German Chancellor (Angela) Merkel to explain the importance of coordinated measures. Germany's reluctance has so far prevented the eurozone adopting a coordinated approach.
The US approved a 700-billion-dollar rescue package for financial firms last week that will see the Treasury buy up toxic debt from banks in a bid to encourage them to continue lending.
On Wednesday, leading central banks unleashed coordinated interest rate cuts on Wednesday in their latest attempt to counter the financial problems, caused by bad debts linked to declining house prices in the United States.
Japanese Prime Minister Taro Aso on Tuesday urged the G7 to send a "strong message" on the market turmoil. "If the G7 fails to send a strong message, it will have a big impact which I am concerned could spread to Japan," Aso told reporters.
The Economic Times
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