G-7 leaders pledge co-operation

Dubai: The finance ministers and central bank governors of the G-7 said on Saturday the current situation calls for "urgent and exceptional action" while committing to continue working together to stabilise financial markets and restore the flow of credit, to support global economic growth.

In a joint communique issued by them, the G7 officials, said: "We agree to take decisive action and use all available tools to support systemically important fin-ancial institutions and prevent their failure and take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding."

They said they will ensure that banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

"We will ensure that our respective national deposit insurance and guarantee programmes are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits," they said.

Whether these actions bring back investor and public confidence back is something to be seen in the coming days.

Meanwhile, US Treasury Secretary Henry Paulson said: "This action plan provides a coherent framework that will direct our individual and collective policy steps to provide liquidity to markets, strengthen financial institutions, protect savers, and enforce investor protections.

"A root cause of this situation is the housing correction and a lack of confidence in mortgage assets, as well as a lack of confidence in many of the financial institutions that hold these assets. We are squarely focused on the immediate need to stabilise our financial markets and recognise that investor confidence is critical to restore liquidity and enhance the stability of our financial system."

Global event

As recent developments have demonstrated, the market turmoil is a global event, he said, urging the governments to take actions to address market developments. "It is critical for governments to continue to take individual and collective actions to provide much-needed liquidity, strengthen financial institutions, enhance market stability, and develop a comprehensive regulatory response," he said. "We must continue to closely coordinate our actions and work within a common framework so that the action of one country does not come at the expense of others or the stability of the system as a whole."

The meeting was held on the sidelines of the annual meetings of the Boards of Governors of the International Monetary Fund (IMF) and World Bank, in which the UAE Central Bank governor is also participating.

Sultan Bin Nasser Al Suwaidi, UAE Central Bank Governor, said: "This year a large amount of time will be dedicated to discussing the liquidity crisis and the financial market turmoil, especially in the advanced industrial countries. The discussion will include analysis of reasons that led to these crises and solutions, or what is called policy response, i.e. changes in monetary policies and those relating to capital markets.

"The national and foreign banks in the UAE enjoy a strong financial position. About 75 per cent of the banks' deposits are owned by UAE nationals, followed by 17 per cent by non-Arab foreigners," he said.

The world must act quickly, forcefully and cooperatively to contain the ongoing financial and economic downturn, Dominique Strauss-Kahn, Managing Director of the IMF, said in an address at the Peterson Institute for International Economics.

Confidence issue

He noted that turmoil in financial markets has become a crisis of confidence, requiring decisive government intervention.

"What will restore confidence is government intervention that is clear, comprehensive and cooperative among countries," he said.

"The private sector cannot restore confidence on its own. Macroeconomic policy measures by governments will not restore confidence on their own. Piecemeal measures on financial markets will not restore confidence on their own," he added.

Strauss-Kahn highlighted four sets of actions built on a foundation of government accountability:

• Explicit public guarantees of financial system liabilities: The fragility of public confidence has reached a point where explicit public guarantees of financial system liabilities, which will be temporary and with safeguard measures, is unavoidable. This would cover not only retail bank deposits but probably interbank and money market deposits, so that activity may restart in these key markets.
• Government purchases of troubled assets to force loss recognition: Governments need to eliminate troubled assets by purchasing them at fair value. This will force the recognition of losses by the financial institutions.
• Capital injections by governments: As private money is scarce in today's environment, government support is needed. One strategy that has worked in past crises is to match new private capital subscriptions with government capital, which imposes a market test for the use of public funds.
• A high degree of international cooperation: During the past week the collapse of confidence in the markets has been almost matched by a collapse of confidence between countries. This has promoted a trend towards unilateral measures taken with national interests in mind, and with unintended "beggar-thy-neighbour" consequences for others.

On global macro-economic conditions, Strauss-Kahn warned of the longer-term effects that the current market crisis will have. In the United States, households and businesses may have a healthier attitude to risk, but there may be a need for macroeconomic policies to support the economy if both private investment and consumption weaken in the near term.

Western Europe has also been hit hard. He pointed out that while the region has not encountered a major foreign exchange crisis owing to the success of the euro, European countries still face significant challenges in dealing with the current financial crisis.

Strauss-Kahn said that although many emerging economies are in a better position than in the past, they are still at risk due to high external financing needs and in some cases banking system fragilities. While the authorities should take measures tailored to their circumstances, the IMF will be ready to provide timely financial support for emerging economies, if needed, Strauss-Kahn said.

A root cause of this situation is the housing correction and a lack of confidence in mortgage assets... We are focused on the need to stabilise our markets and recognise that investor confidence is critical to restore liquidity and enhance the stability of our financial system."

Henry Paulson

Treasury secretary