G7 finance ministers last night agreed on what US Treasury secretary Henry Paulson called an “aggressive action plan” to deal with growing turmoil in global financial markets. “I am confident that this plan will succeed,” declared Paulson, after a day in which the Dow Jones index saw its biggest fall in history and other markets also crumbled.
The five-point plan aims to restore shattered confidence in the financial system, by shoring up banks and other financial institutions in danger of collapse, and unfreezing credit markets that are no longer functioning. The plan is “a coherent framework” for individual and collective policy steps to “provide liquidity to markets, strengthen financial institutions, protect savers and enforce investor protections”, Paulson said.
Paulson said the plan’s significance is that all G7 members – the US, Canada, Germany, France, Italy, Britain and Canada – have agreed on a common approach to dealing with the financial system’s crisis. Each country will have to implement the plan according to its own laws, he added.
The G7 ministers will today meet their counterparts from the G20 group of advanced and emerging economies, and Paulson predicted that some emerging market countries would take actions similar to those pledged by the G7. “We are all dependent upon one another” to solve the crisis, he said.
The G7 ministers said in an unusually terse communique issued after yesterday’s meeting that “urgent and exceptional action” is needed. “We are committed to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth.”
The ministers agreed to “take decisive action and use all available tools to support systemically important financial institutions and prevent their failure”, and to “take all necessary steps to unfreeze credit and money markets, and ensure that banks and other financial institution have broad access to liquidity and funding”.
They also agreed to ensure that banks and other major financial intermediaries could “raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending”.
They also promised to “ensure that our respective national deposit insurance and guarantee programmes ae robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.” They pledged action, where appropriate, to restart secondary markets for mortgages and other securitised assets. “Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.”
Such actions “should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF’s critical role in assisting countries affected by this turmoil”, the communique concluded.
Mervyn King, the Governor of the Bank of England, who attended the G7 meetings, said that central banks could jointly “ensure sufficient short term liquidity is provided”, as they had done this week. “But it is also vital that governments work together to ensure their banking systems are recapitalized.”
After the G7 meeting, European Central Bank president Jean-Claude Trichet sought to play down expectations of a massive rebound in share prices when financial markets open on Monday. “It is my experience of markets that they take a little time for markets to compute the elements of the decisions we are taking,” Trichet said. “I hope the markets will see this as an important element of confidence.” Trichet said that central banks and governments had taken many steps in recent weeks to intervene in the crisis. “Central banks have had a fantastic chance to act together and display intimate composure and unity.”