G7 finance ministers warned yesterday that financial market turbulence is likely to continue in the wake of the US sub-prime mortgage market crisis, and announced measures to ensure a more “sound and transparent” market environment in the future. They called on market participants to “address many of the shortcomings that were exposed by recent events”.
The ministers added in their communique, issued at the end of the worst week for three months in the US stock market: “Following recent global market turbulence, the functioning of financial markets is improving.
“Strong global fundamentals and well-capitalized financial institutions provide a sound and resilient basis, but uneven conditions are likely to persist for some time and will require close monitoring.”
This echoed the view being expressed by bankers and other financial market participants. “The time that it will take the system to work out these excesses is going to be a much longer period than most people expected”, former Bank of Israel governor Jacob Frenkel told Emerging Markets last night.
US Treasury secretary Henry Paulson, at a press conference after the ministers’ meeting, offered reassurances. “I reported to my colleagues that we confront these current challenges against the backdrop of a strong economy, not just in the US but globally,” he said.
“The outlook for the reaminder of 2007 and 2008 remains quite healthy, influenced heavily by the performance of emerging market economies, particularly China.” He also urged “some rebalancing of domestic demand growth” in the OECD.
The finance ministers have asked the Financial Stability Forum (FSF) to analyze the underlying causes of turbulence, the communique added.
In order to ensure a sound, transparent, and comprehensive framework, the FSF has been tasked to come up with “proposals in the areas of liquidity and risk management; accounting and valuation of financial derivatives; role, methodologies and use of credit rating agencies in structured finance; and basic supervisory principles of prudential oversight, including the treatment of off-balance sheet vehicles”.
The communique added: “Our response to recent financial turbulence must be based on full analysis of its causes. Securitization and financial innovation have contributed significantly to the growth of our economies.
“We expect market participants to address many of the shortcomings that were exposed by recent events.”
The ministers also turned their focus to sovereign wealth funds. “Cross-border, market-based investment is a major contributor to robust global growth,” they said. “In this context, we agreed that sovereign wealth funds [SWFs] are increasingly important participants in the international financial system and that our economies can benefit from openness to SWF investment flows.
“We see merit in identifying best practices for SWFs in such areas as institutional structure, risk management, transparency and accountability. For recipients of government-controlled investments, we think it is important to build on principles such as non-discrimination, transparency, and predictability.
We are committed to strengthening our dialogue with countries involved,” said the ministers who met last night with heads of the world’s leading half dozen leading sovereign wealth funds, including those of China and Saudi Arabia.