G7 begins to get to grips with crisis, doubts remain: analysts
Friday, April 11, 2008
WASHINGTON - The Group of Seven industrialized countries began Friday to get to grips with the global financial market crisis but they have been slow to recognize the problems and concerns remain, analysts said.
They said the G7 -- Britain, Canada, France, Germany, Italy, Japan and the United States -- was correct to note the economy is weakening and positive in requiring the banks to start revealing the true state of their accounts within 100 days.
This was especially welcome because only when the markets have transparency can the distrust at the heart of the credit crunch be lifted and funds can begin to flow again, they said.
The G7 warned that the world economy "continues to face a difficult period ... (and) near-term economic prospects have weakened.
"The turmoil in global financial markets remains challenging and more protracted than we had anticipated," it said.
Mark Weisbrot, an economist and co-director of the Center for Economic and Policy Research in Washington, said "it is very positive that the G7 recognizsed this ... I think that is about right."
At the same time, Weisbrot said the G7 and others have been slow to recognise the problems in the US economy, which even if the financial sector issues are resolved, "will still be in the worst recession in decades."
The G7 also approved a Financial Stability Forum (FSF) report on ways to prevent a repetition of the financial crisis and had identified several recommendations for implementation "within the next 100 days."
Ranked first, "firms should fully and promptly disclose their risk exposures, write-downs, and fair value estimates for complex and illiquid instruments."
They also outlined steps to ensure greater transparency and certainty in the financial system, better risk management and improved regulatory oversight.
Analysts said this was a definite step in the right direction but Weisbrot also expressed some skepticism.
"That is very good, that is one of the things dragging out the resolution of the crisis as nobody knows who has got what" and how much it is worth, he said of the banks.
"I am all for that but ... how did all these people miss the two biggest asset bubbles (in stocks and property) growing to huge proportions ... how did they miss them and not say anything about them at the time," he said.
For Peter Morici, an economist and business professor at the University of Maryland, the question is will the measure really be implemented.
"To fix the financial system and to have greater transparency in the creation of securities and derivatives, you're going to have to regulate the investment banks," Morici said.
"You're going to have to require the banks to keep everything they do on their books and there doesn't seem to be much of an appetite for that in the United States."
The crisis stems fundamentally from a mispricing and misreading of the risks involved in new investment instruments which were often kept off the balance sheets of the banks and finance houses.
This created the illusion that risk had been drastically reduced, with the credit markets said to be so deep and sophisticated that they could cope with large amounts of stress and ensure funds were always available.
Then as US subprime or high-risk home owners began defaulting on their mortgages, they set off a chain reaction, sparking a credit squeeze whose effects are now rippling out further and further into the wider economy.
"We all realize that risk management hasn't been effectively regulated and part of the problem is that we are denying that there is risk," Morici said.
"Financial engineers tried to convince us that they can make risk disappear" but that is not possible, he said.
In the end, the G7 and other international groups cannot address the problems that their memmber governments are "unwilling to address themselves domestically."
Some G7 officials too seemed cautious on the need for greater regulation, mindful of the special interests of their own financial industries.
British Finance Minister Alistair Darling said "our response needs to be measured and proportionate ... it is not a question of more regulation -- often it is a question of regulators and management doing their job effectively."
04/12/2008 01:45 GMT
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