By Alan Beattie in Washington and Joe Leahy in São Paulo
The statement on Sunday by the Group of Seven rich countries pledging to “take all necessary measures” to support financial stability was largely dismissed by market participants and economists, who said it was a bland attempt at reassurance with little policy content.
The declaration, which repeated familiar general commitments to safeguard financial stability and co-operate as appropriate on foreign exchange markets, was no substitute for action by eurozone authorities to constrain financial contagion and by the US to get its public finances under control, they said. The episode also underlined the limits of the much-touted G20 as a forum for international economic management.
“The G7 can’t do much more than wave a magic wand and hope for the best,” said Stephen King, chief economist at HSBC in London. “As for the institutions of international policy co-ordination – what happened to the G20?”
Finance ministers and central bank governors from the wider G20 grouping, which includes systemically significant emerging market countries, put out a shorter and blander statement several hours after the G7. “In a situation like this, if you are really going to tackle problems head on, you need China to be involved,” said Uri Dadush, an expert in international economic policy at the Carnegie Institute in Washington. “What they are doing at the moment is just a palliative.”
Mr Dadush said that the decision to exclude China from discussions most likely reflected established habit and the desire to act quickly. China sharply criticised the US for its fiscal mismanagement over the weekend following the US sovereign downgrade by Standard & Poor’s on Friday, weakening the appearance of international solidarity in coping with the debt crises in the US and the eurozone. “China’s strong statement indicated that there is clear tension there,” Mr Dadush said.
The episode continued a pattern of recent years of intervention during serious and fast-moving financial crises being restricted to a relatively small group of rich countries. It was the G7 rather than the G20 that conducted a joint intervention earlier this year to weaken the Japanese yen. A slightly expanded G7 grouping including the Swiss and Swedish central banks orchestrated a co-ordinated cut in interest rates in October 2008 as global financial markets seized up in the aftermath of the collapse of the investment bank Lehman Brothers.
Jonathan Loynes, chief European economist at the consultancy Capital Economics, said that financial markets generally brushed aside general announcements like Sunday’s G7 statement and concentrated instead on the actions of individual governments and central banks. “The eurozone is having enough difficulty co-ordinating policy among its own members, so I don’t think the G7 can do much to help,” he said. “Markets are pretty smart, and they can see the difference between a policy change and a general statement”.
The director of monetary policy at Brazil’s central bank, Aldo Mendes, said he believed the G7 response was sufficient and there was no need to engage the G20. “What we saw today was an increase in risk perception, which was without doubt mirrored in the fall in the stock markets, but the demand for sovereign debt appeared firm in the US and Europe,” Mr Mendes told the Financial Times.
He said the US downgrade would not alter Brazil’s policy of maintaining its dollar reserves while “diversifying at the margin”.
The G7 statement, and the movements in financial market assets on Monday, appeared to centre more around the problems in the eurozone and a general sense of weakness in the world economy than the ratings downgrade in the US. Mr Dadush said that if Spain and Italy required fresh assistance even after the European Central Bank’s commitment to buy bonds, it needed to be a broad global effort with the International Monetary Fund also involved.
Mr King said that any co-ordinated effort to help the global economy would require a general agreement to let the renminbi rise in return for fiscal tightening in the US, a bargain that has eluded Washington and Beijing in recent years.
If G7 central banks, especially, the Federal Reserve, reacted to economic weakness by loosening monetary policy, that could merely reignite concerns of attempted competitive devaluation, he said.
Source: http://www.ft.com
The statement on Sunday by the Group of Seven rich countries pledging to “take all necessary measures” to support financial stability was largely dismissed by market participants and economists, who said it was a bland attempt at reassurance with little policy content.
The declaration, which repeated familiar general commitments to safeguard financial stability and co-operate as appropriate on foreign exchange markets, was no substitute for action by eurozone authorities to constrain financial contagion and by the US to get its public finances under control, they said. The episode also underlined the limits of the much-touted G20 as a forum for international economic management.
“The G7 can’t do much more than wave a magic wand and hope for the best,” said Stephen King, chief economist at HSBC in London. “As for the institutions of international policy co-ordination – what happened to the G20?”
Finance ministers and central bank governors from the wider G20 grouping, which includes systemically significant emerging market countries, put out a shorter and blander statement several hours after the G7. “In a situation like this, if you are really going to tackle problems head on, you need China to be involved,” said Uri Dadush, an expert in international economic policy at the Carnegie Institute in Washington. “What they are doing at the moment is just a palliative.”
Mr Dadush said that the decision to exclude China from discussions most likely reflected established habit and the desire to act quickly. China sharply criticised the US for its fiscal mismanagement over the weekend following the US sovereign downgrade by Standard & Poor’s on Friday, weakening the appearance of international solidarity in coping with the debt crises in the US and the eurozone. “China’s strong statement indicated that there is clear tension there,” Mr Dadush said.
The episode continued a pattern of recent years of intervention during serious and fast-moving financial crises being restricted to a relatively small group of rich countries. It was the G7 rather than the G20 that conducted a joint intervention earlier this year to weaken the Japanese yen. A slightly expanded G7 grouping including the Swiss and Swedish central banks orchestrated a co-ordinated cut in interest rates in October 2008 as global financial markets seized up in the aftermath of the collapse of the investment bank Lehman Brothers.
Jonathan Loynes, chief European economist at the consultancy Capital Economics, said that financial markets generally brushed aside general announcements like Sunday’s G7 statement and concentrated instead on the actions of individual governments and central banks. “The eurozone is having enough difficulty co-ordinating policy among its own members, so I don’t think the G7 can do much to help,” he said. “Markets are pretty smart, and they can see the difference between a policy change and a general statement”.
The director of monetary policy at Brazil’s central bank, Aldo Mendes, said he believed the G7 response was sufficient and there was no need to engage the G20. “What we saw today was an increase in risk perception, which was without doubt mirrored in the fall in the stock markets, but the demand for sovereign debt appeared firm in the US and Europe,” Mr Mendes told the Financial Times.
He said the US downgrade would not alter Brazil’s policy of maintaining its dollar reserves while “diversifying at the margin”.
The G7 statement, and the movements in financial market assets on Monday, appeared to centre more around the problems in the eurozone and a general sense of weakness in the world economy than the ratings downgrade in the US. Mr Dadush said that if Spain and Italy required fresh assistance even after the European Central Bank’s commitment to buy bonds, it needed to be a broad global effort with the International Monetary Fund also involved.
Mr King said that any co-ordinated effort to help the global economy would require a general agreement to let the renminbi rise in return for fiscal tightening in the US, a bargain that has eluded Washington and Beijing in recent years.
If G7 central banks, especially, the Federal Reserve, reacted to economic weakness by loosening monetary policy, that could merely reignite concerns of attempted competitive devaluation, he said.
Source: http://www.ft.com
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