Finance officials from the Group of 20 nations on Thursday pledged to preserve financial stability and said central banks were ready to provide liquidity as needed, but a communique after the meeting offered few hints of fresh action to contain Europe’s raging debt crisis or revive the faltering global economy.
“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the G20 officials said in a communique after a dinner meeting to discuss the European crisis.
Financial markets were little fazed by the G20 statement after plunging overnight on fears of another global recession and disappointment that European officials have been unable to come up with a coordinated game plan to arrest the euro zone’s debt mess.
“The G20 communiqué fell short of prescribing the exact medication to address the underlying ills faced by the euro zone members and heightened volatility in the global financial markets at present.
“Assurances were aplenty to preserve the stability of banking systems and financial markets, along with efforts to allay frayed nerves that banks were adequately capitalized and had access the sufficient funding.
“The statements might offer some sense of calm to regional bourses for the immediate term, though we expect the optimism to wear off soon as focus shifts yet again to realities on the ground: Greece’s ability to receive the bailout funds alongside containing contagion debt risks out of the euro zone. In light of underlying political and economic differences, it’s probably each one for their own.”
“Monetary conditions in the U.S., the euro zone and Japan are too tight, and if they were to ease them, that would quell the panic immediately. The Swiss National Bank two or three weeks ago showed the way - they devalued the currency. But obviously it’s difficult for all of them to do collectively unless they devalue against gold or some commodity baskets, something like that.
“Apart from making comforting sounds about the global economy and their commitment to stability, the other measures that would have to be taken to improve the situation are politically very difficult and beyond the reach of this group at least in the short run.”
SHI CHENYU, ECONOMIST, INDUSTRIAL AND COMMRECIAL BANK OF CHINA, BEIJING
“Whether such statements can achieve the desired effect (bolstering confidence and calming markets) is worth questioning. First of all, there are no concrete steps along with these words.
“In addition, countries often start to point at each other over policy issues, like exchange rate issues, at international meetings when economic growth is weak.
“So, the market will remain nervous about growth prospects and negative implications for the financial system.”
SHANE OLIVER, HEAD OF INVESTMENT STRATEGY, AMP CAPITAL, SYDNEY
“The bottomline is they need to follow up with action. Until markets see coordinated action, they’re not going to get a lot more confident.
“We need to see concrete action involving coordinated monetary policy easing globally and a massive increase in the firing power of the EFSF or the ECB to buy bonds in indebted European countries. Without any hard action, investors will quickly see through it and it won’t provide any help.”
“G20 typically doesn’t have concrete actions. It does not allay fears. After the Fed announcement we may see a USD structural move, which means global risk aversion has reached a new threshold. Asian currencies will fall more as we still have uncertainty from the euro zone. Until the euro zone comes out with some form of actionable plan to allay fears and there are signs of a U.S. economic turnaround this will go on, probably until 4Q 2011.”
JONATHAN CAVENAGH, SENIOR FX STRATEGIST, INSTITUTIONAL FX SALES, ASIA, WESTPAC INSTITUTIONAL BANK, SINGAPORE
“None of the headlines have been that inspiring so far, we still feel the risk is that the market is left disappointed. USD/Asia should continue to push higher in our view.
“The communiqué lacks these: 1) rhetoric: statements that they stand ready if FX gets too disorderly; 2) BRICs create a small fund to buy EU debt; 3) ECB relaunches unlimited one-year refinancing operations; 4) more cuts in collateral requirements for use within euro system; 5) the USD three-month funding could be expanded to include all the G20, not just the G7; 6) G7 central banks might agree to eliminate the 100 basis point charge over IOS for three-month USD funds.
“These were some of things that have been talked about or rumored, etc. but we haven’t heard any of these being implemented. My advice is to buy USD/Asia on dips, with the Korean won and Indonesian rupiah still at risk of foreign investor outflows.”
“It is a clear disappointment to those looking for the G20 to take action to combat the recent market and economic strains. I wouldn’t be surprised to see the slight bounce we have seen in the euro and other risky assets this morning start to unwind.
“There was some expectation in the market that they would signal concrete action or immediate coordinated steps but the language of their statement sticks very much to what we’ve heard from them in the past and does not suggest that there is anything new on the policy front in store.
“They are reaffirming their commitment to earlier policy decisions but the fact of the matter is both major and emerging market countries have less policy flexibility at this stage.”
“This is the same old menu. It supplies some confidence at least for the next few hours. The sense I am getting is that there is some agreement among the group but rather than take any singular mechanism to reinstate stability, each of them will do their own part. We will have to see what the IMF and the World Bank says but these comments are nothing new.”
- World leaders and finance chiefs pushed Europe this week to quell its debt crisis before it spreads further and threatens a systemic banking crisis that could damage the global economy.
- Fears that the U.S. economy may be tipping back into recession also have heightened worries about the global economy. Private sector business activity in Europe and China declined sharply this month, and new claims for U.S. jobless benefits remained high.
- As finance ministers and central bankers gathered for talks in Washington amid growing concern about sharply slowing growth and plunging stock markets, the leaders of the seven major economies stressed the need to contain the euro zone crisis, but no fresh, concrete plans have been announced.
- Separately, officials from the so-called BRICS countries, including heavyweights China, Brazil and India, said they would consider giving more funds to the International Monetary Fund to boost global stability.
But India issued a reminder that developing countries were not in a position to bail out richer economies.
- An internal IMF staff report obtained by Reuters last week showed that the fund could comfortably lend out another $390 billion without endangering its balance sheet. But in a worst-case scenario, it may face demands for $840 billion.
- World stocks plunged on Thursday and extended losses on Friday as investors worried about the grim global growth outlook, including data pointing to a slowdown in China, one of the world’s key economic engines.
- The U.S. Federal Reserve on Wednesday ramped up its aid to the beleaguered U.S. economy, launching an effort to put more downward pressure on long-term interest rates and increase its support for housing.
It warned of “significant” downside economic risks, triggering a fresh round of financial market turmoil as investors dumped riskier assets and looked for safe havens such as gold.