Monday, February 11th, 2008
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G7 is told worldwide losses from sub-prime crisis could be $400bn
Quote:
G7 is told worldwide losses from sub-prime crisis could be $400bn
· Finance ministers fail to agree on remedial action
· Inflation is leading worry for European countriesFinance chiefs from the G7 group of rich countries have warned that the global economy faces a period of slower growth as a result of the US mortgage crisis and projected the levels of the size of the sub-prime losses could be as high as $400bn (£200bn). They stopped short of agreeing on concerted action to stimulate demand.
In a statement issued after a day of talks in Tokyo at the weekend, the leaders said economic fundamentals remained "solid" but that downside risks remained. "The world confronts a more challenging and uncertain environment than when we met last October," the G7 said. "We will continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies."
After the meeting, Peer Steinbrück, German finance minister, said the G7 was worried that the write-offs on US subprime mortgages could reach $400bn. This figure is significantly higher than the $120bn Wall Street and other financial institutions have revealed recently, and the $100bn which Federal Reserve chairman Ben Bernanke suggested in testimony to Congress last month.
With European countries more concerned about inflation than demand, no agreement was reached on a coordinated response, such as a blanket cut in interest rates. While the US has cut rates and passed a $168bn fiscal stimulus package to boost demand, other leaders focused on improving transparency among financial institutions.
But the G7 did call on banks to bolster confidence in their sector with better liquidity risk management and full disclosure of their sub-prime losses.
Mario Draghi, governor of the Bank of Italy and chair of the Financial Stability Forum, a committee of international supervisors and central bankers, said the next 10 days to two weeks would be crucial as many banks issue their first audited accounts since the crisis.
Asked about the extent of total exposure to the US sub-prime mortgage sector, Draghi said: "The only thing we know is that it's big and we keep on discovering new dimensions to it."
Discussions were dominated by fears of a US slowdown. The US treasury secretary, Henry Paulson, said the American economy would continue to grow this year despite fallout from the sub-prime crisis and concerns over rising oil prices. He added: "While financial markets are improving, it will take time to work through the current financial turmoil."
The leaders said little about exchange rates, despite concern about the strength of the euro.
They encouraged China to speed up the appreciation of the yuan to increase demand for imports, but did not discuss the depreciation of the dollar.
They voiced concern over rising energy prices amid increasing demand in China and India, and urged oil-producing countries to boost output.
The leaders backed an interim report by the Financial Stability Forum calling for prompt and full disclosure by financial institutions of their losses and better liquidity risk management. They also urged credit ratings agencies to provide customers with more accurate information about structured financial products.
But the G7 warned that "further shocks" were a possibility.
"It is likely that we face a prolonged adjustment, which could be difficult," the report said.
The chancellor, Alistair Darling, said the Britain was well placed to weather the slowdown and resist inflationary pressures. "We do have room for manoeuvre that we did not have in the early 1990s," he told reporters. "The action that we take in the British economy won't necessarily be the same as other countries because our economic position is different."
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