Saturday, September 15, 2007

Europe to Avoid Regulatory Rush Amid Financial-Market Turmoil

By Simon Kennedy and Sandrine Rastello

Sept. 15 (Bloomberg) -- European finance ministers and central bankers said they would resist overreacting to turbulence in financial markets by rushing to impose unwieldy regulations.

At their first talks since international credit costs soared in reaction to the collapse of the market for U.S. subprime mortgages, the officials yesterday commissioned a review of whether they need to rewrite rules for lenders and credit-rating companies, while stopping short of pledging to take action.

``Not everything can be dealt with through regulation -- it's not a magic wand,'' Portuguese Finance Minister Fernando Teixeira Dos Santos told reporters after chairing the talks on the first day of a two-day meeting in Oporto, Portugal. European Central Bank President Jean-Claude Trichet said ``it is too early to draw definitive conclusions.''

Governments worldwide are researching how they can protect their economies from the global credit crunch and avoid a repeat of it. The European calls for caution echo those of U.S. officials, setting the stage for deeper conversations when a brace of studies are presented at next month's meetings of EU ministers in Brussels and Group of Seven nations in Washington.

What began as a crisis in the U.S. market for home loans to borrowers with poor credit histories has spread around the world as banks face losses from their U.S. investments or find it hard to access capital as lenders retreat from risk and raise the cost of credit. Newcastle, U.K.-based Northern Rock Plc yesterday turned to the Bank of England for emergency funding amid a ``severe liquidity squeeze.''

`Heightened Uncertainties'

While acknowledging ``heightened uncertainties and downside risks,'' the European officials said in a statement that falling unemployment and healthy corporate profits will enable their economy to grow in line with its trend through next year.

``We don't need to be pessimistic given we've got good fundamentals,'' European Union Economic and Monetary Affairs Commissioner Joaquin Almunia told reporters.

The European review of markets will be carried out by the EU's Economic and Finance Committee and dovetails with one commissioned by G-7 governments and being conducted by the Basel- based Financial Stability Forum. Both will be delivered next month and among the areas being researched are the transparency of credit-rating agencies and how banks manage and report risk.

``Maybe some other regulatory issues will have to be addressed, but we should take our time and do the right thing,'' EU Financial Services Commissioner Charlie McCreevy said in an interview. ``The quick-fire reaction of regulation is inevitably wrong.''

Global Approach

U.S. Treasury Undersecretary David H. McCormick said two days ago that it was important not ``to get caught up in the rhetoric that is not supported by facts.'' U.S. Treasury Secretary Henry Paulson will likely discuss the global approach when he travels to Europe to meet his French and U.K. counterparts next week.

``I don't want to take action here that ultimately undermines the competitiveness of our capital markets,'' McCormick, Paulson's top international adviser, told reporters in Washington. ``That's critical.''

Julien Carmona, chief financial officer of France's Groupe Caisse d'Epargne, said in a Sept. 13 interview that Europe and the U.S. must work together on a response to the market rout. ``In case of a trans-Atlantic crisis, a purely European initiative would have its merit but wouldn't be sufficient,'' said Carmona, previously an economic adviser to former French President Jacques Chirac.

In the meantime, ECB President Trichet said the central bank will continue to ``do what is necessary'' to keep money markets functioning while ensuring ``upside'' risks to price stability do not get out of hand.

`High Price'

``We must not let the mistakes made by some impose on people who made no mistake a high price, because the money market won't function,'' Trichet said.

The Frankfurt-based ECB was praised by ministers for its response to the crisis, which included lending more than 250 billion euros ($347 billion) to banks in special auctions and leaving its key interest rate unchanged at 4 percent.

The ECB acted with ``exemplary fashion and with great style,'' said Luxembourg Prime and Finance Minister Jean-Claude Juncker, an otherwise frequent critic of the central bank.

Trichet played down differences in strategy with the Bank of England, whose governor, Mervyn King, this week refused to relax its system for money-market lending because doing so ``encourages excessive risk-taking, and sows the seeds of a future financial crisis.''

Each central bank has ``done very well'' given the situation in its specific economy and markets, Trichet said.

Last Updated: September 15, 2007 05:36 EDT

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