Doubts grew in the international financial community yesterday about the ability of the G7’s package to resolve the systemic crisis.
Jacob Frenkel, vice chairman of the AIG group, said the plan was “too amorphous” to have any strong impact on market sentiment. The G7 “did not specify any dates” for its proposed policy actions, Frenkel, former governor of the Bank of Israel, charged in a speech to an Institute of International Finance conference. “We need to be precise and to get to the details.”
Demands for more specific policy actions were echoed by Hung Tran, senior director of the IIF. The G7 moves “are clearly steps in the right direction, of coordinated measures affecting all three areas of weakness: troubled asset markets, the capital adequacy of some banks and the funding market crisis.
“But we need specific policy measures that are operationalized and have an impact in the market place.” Mario Draghi, chairman of the Financial Stability Forum, warned against expecting any sudden turnaround in plunging financial markets. The current turmoil is “rooted in the psychology of investors all over the world and you are not going to see that change in a day.”
The worries about the G7 package expressed yesterday built on criticisms voiced on Friday in the hours after it was adopted, reported in Emerging Markets yesterday.
In response, both US Treasury secretary Henry Paulson and IMF managing director Dominique Strauss-Kahn declared their confidence that the plan would unfreeze markets.
Paulson claimed that it was not possible for the G7 ministers to be too specific as to timing of the measures, or their precise form because each country has different laws and will have to operate under different rules in the way they go about implementing the package.
Strauss-Kahn said that the measures would “unfreeze financial markets and restore funding”. The G7 plan, outlined in a communique on Friday, is for coordinated action by the largest economies – to “use all available tools” to support important institutions, to “take all necessary steps” to unfreeze markets, to enable financial institutions to raise capital, to provide “robust” deposit insurance and high accounting standards.
Some argue that the most important impact of the G7 plan will be to bolster market confidence. David Hale, former chief economist at Zurich Financial Services, said yesterday in Washington: “I think that the policy actions have the potential to stabilize the markets. I am surprised that the stock market is still in a free fall but I am hopeful that these emotions will stabilize at some point in the next few days – maybe on Monday.”
Robert Hormats, managing director of Goldman Sachs International in New York told Emerging Markets: “What the G7 said was right on the mark. By demonstrating the collective effort it enables ministers to go back and do things in their own countries.
“At this point, I suspect that there are some governments that are going to have to do this [guarantee all liabilities of the financial system]. This is one of the issues that’s going to be discussed in the follow up. But if one government does it, because we have this global capital market, it’s probably important that they do it in some sort of common effort.”