The Group of Seven has warned that the sputtering global economy needs vigorous measures to keep it from crashing. Finance chiefs outlined several immediate steps for improvement at their meeting in Washington.
The aftershocks of the US subprime crisis are shaking up the financial world
"The turmoil in global financial markets remains challenging and more protracted than we had anticipated," said financial chiefs from Germany, Britain, Canada, France, Italy, Japan and the US after their meeting in the American capital on Friday, April 11.
The Group of Seven finance ministers and banking leaders emphasized their strong commitment to work together and the need for greater transparency in the financial sector.
Financial leaders want to work together, but some are wary of closer monitoring
Ongoing weakness in US residential housing markets, stressed global financial market conditions, the international impact of high oil and commodity prices, and inflationary pressures were the major struggles facing the global economy, said the finance ministers and central bank governors of the G7 major industrial countries.
Change of tone on currency
They noted "sharp fluctuations" in major currencies since their last meeting in Tokyo in February. While saying they were "concerned about the possible implications for economic and financial stability," the officials also called for calm in response to concerns by European leaders over volatile foreign exchange markets.
The expression of its concern represented the first shift in four years in the G7's stance on currencies. "This change in the language … shows a concern we have not seen for some years," said Italian Economy Minister Tommaso Padoa-Schioppa.
Major central banks have recently undertaken multi-billion dollar cash injections into turbulent financial markets recently as the dollar has plunged to record lows.
The group, however, did not declare the US economy in recession -- a term experts have been hesitant to use -- nor did it recommend the use of public funds to bail out troubled markets, an idea that had been widely discussed before the meeting.
Banks have already written down some $225 billion in assets ties to failing mortgages and loans in 2007 and 2008, said Germany's Finance Minister Peer Steinbrueck.
"Numbers like that can cause a lot of fear," he said.
What next? Experts give advice
Change is easier said than done
The finance chiefs strongly endorsed a report by the Financial Stability Forum (FSF), comprised of central bankers and regulators, which it had commissioned to recommend ways to turn around the current bleak situation and prevent a recurrence.
"Firms should fully and promptly disclose their risk exposures, write-downs, and fair value estimates for complex and illiquid instruments," recommended the financial leaders.
In addition, they said that the International Accounting Standards Board (IASB) and other standard-setters should "initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities" and provide closer guidance in valuing financial instruments."
Off-balance sheet entities have been blamed for covering up the true extent of banks' exposure to the US high-risk subprime mortgage crisis, as it prevented risks from being fairly assessed.
Increased regulation, however, did not seem to sit well with all of the representatives.
"Our response needs to be measured and proportionate," said British Financial Minister Alistair Darling. "It is not a question of more regulation -- often it is a question of regulators and management doing their job effectively."
The central bank governors met in Washington
The International Monetary Fund holds its spring meeting on Saturday, April 12, in Washington, days after it warned that the economic outlook was looking increasingly grim.
It forecast that global expansion would slow to 3.7 percent in 2008, cutting its earlier predictions and warning that there was a 25 percent chance that growth would fall further, leaving the world effectively in recession in 2008 and 2009.
On Thursday, the IMF's managing director, Dominique Strauss-Kahn, said the organization would play a central role in confronting the global financial turbulence, adding that the current crisis was the biggest since the Great Depression of the 1930s.
He said there is a need to analyze the links between the financial sector and the real economy and the IMF was "one of those rare" institutions which could do that.