Sunday, February 10, 2008

G-7 Growth Warning May Prompt Additional Rate Cuts, Lower Taxes

By John Fraher

Feb. 11 (Bloomberg) -- Group of Seven officials, warning of further financial-market turmoil, indicated they'll be forced into more interest-rate cuts and tax reductions to shore up the global economy.

Finance ministers and central bankers ended a weekend meeting in Tokyo with a statement that ``downside risks persist,'' including the U.S. housing slump and tighter credit conditions. Without proposing specific remedies, the group pledged ``appropriate actions, individually and collectively.''

The speed at which the American credit-market collapse spread to other parts of the world demonstrates the need for greater communication and coordination, U.S. Treasury Secretary Henry Paulson said. More than $6.7 trillion has been wiped off the value of global stocks since the beginning of the year.

``There are going to be more steps coming,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman Inc. in New York. ``The problems of the world economy aren't going to be solved by joint measures, but individual ones.''

Bank of Canada Governor Mark Carney signaled he'll lower rates, and European Central Bank President Jean-Claude Trichet repeated that risks to Europe's expansion have increased. Luxembourg Finance Minister Jean-Claude Juncker, who represents the 15-nation euro region, said some European countries have room to cut taxes or increase spending.

G-7 officials also discussed measures to tighten oversight of financial markets without reaching agreement, and kept pressure on China to allow the yuan to appreciate.

Paulson Dismisses `Myth'

``The current financial turmoil is serious and persisting,'' Paulson said. ``I always thought that decoupling was a myth. What happens in any country, that's a major country, impacts what happens in the rest of the world.''

Service industries in the euro region expanded at the slowest pace in more than four years in January, and business and consumer confidence retreated, reports last week showed. The risk of companies defaulting on high-risk, high-yield loans as measured by the benchmark Markit iTraxx LevX Senior Index rose to a record.

``We are observing an ongoing, significant market correction'' and ``unusually high uncertainty'' is hurting growth prospects, Trichet told reporters after the G-7 meeting.

``If the situation worsens in the markets we'll see greater coordination,'' said Stephen Jen, chief currency strategist at Morgan Stanley in London. The slowdown isn't severe enough for them to ``step on the gas'' right now.

U.S. Package

Germany and Japan signaled they have no plans to follow the example of the U.S. government, which approved a package including tax rebates worth $168 billion to spur growth.

The G-7, which consists of the U.S., the U.K., Canada, Italy, France, Germany and Japan, also cited ``heightened inflation expectations in some countries,'' suggesting some central banks want to limit rate-cut expectations.

Even as officials traveled to Tokyo, some executives fretted the crisis could worsen as subprime losses ricochet through the financial system. Deutsche Bank AG Chief Executive Officer Josef Ackermann said Feb. 7 that rating downgrades for bond insurers pose a new, ``tsunami-like'' risk for markets.

The group said it would promote efforts by banks to improve disclosure of their liabilities and pledged to act on regulators' recommendations to enhance financial stability.

Stability Forum

Its position reflects initial findings of the Financial Stability Forum of international regulators, which will present its full report to the G-7 in April.

Risks remain ``that further shocks may lead to a prolonged recurrence of the acute liquidity pressures experienced last year,'' said Bank of Italy Governor Mario Draghi, who drafted the report. The G-7 estimates banks worldwide will suffer writedowns of $400 billion, German Finance Minister Peer Steinbrueck said.

Action may come from central bankers and politicians. Canada's Carney, in his first month as governor, signaled on Feb. 9 the central bank will cut rates, saying ``the timing and degree of that stimulus will be determined at future fixed announcement dates.'' The next decisions are March 4 and April 22.

Juncker said ``fiscal policy can contribute to stabilizing output'' and Trichet passed on an opportunity to quash investors' bets on a rate cut in forthcoming months.

The G-7 also kept up pressure on China to allow the yuan to rise faster after Canadian and European officials complained their currencies are bearing too much of the dollar's fall.

Yuan Appreciation

``We encourage accelerated appreciation of its effective exchange rate,'' the statement said. The yuan has climbed more than 12 percent against the dollar and fallen about 6 percent against the euro since a decade-long peg was abandoned in 2005.

``While the U.S. may be pleased with the progress made, the Europeans are still focused on the euro-yuan rate and may not be that happy it hasn't changed that much,'' said Jen.

For now, the G-7's main concern is that contagion from the subprime rout will spread further and wider than forecast, and some economists said pessimism could make things worse.

``There's a danger that the downturn will become a self- fulfilling prophecy,'' said Gilles Moec, an economist at Bank of America Corp. in London.

No comments: