G-7 Commit to `All Necessary Steps' to Stem Crisis

By Simon Kennedy and John Brinsley

Oct. 10 (Bloomberg) -- The Group of Seven nations pledged to prevent the failure of key banks while stopping short of new initiatives to unfreeze credit markets.

``The current situation calls for urgent and exceptional action,'' the G-7's finance ministers and central bankers said in a 266-word statement after talks in Washington. Officials pledged to ``take all necessary steps to unfreeze credit and money markets'' without detailing how that would be accomplished.

With stocks falling and a global recession looming, the officials promised to ensure major banks have access to cash and are able to tap public funds for capital. By refraining from specific new measures, the G-7 fell short of some investors' calls for an agreement to guarantee loans between banks.

``Markets wanted to get a game plan from the G-7 and they haven't got that,'' said Sophia Drossos, a New York-based currency strategist at Morgan Stanley. ``There might be disappointment.''

Treasury Secretary Henry Paulson told reporters after the meeting it would be ``naive'' to think that different nations in different circumstances could come up with the same policy paths. He added that no banks were named in officials' discussions today.

Ministers and central bankers from the U.S., Japan, Germany, U.K., France, Canada and Italy convened after stock indexes this month plunged more than 20 percent from Japan to Europe to North America.

Market Panic

The G-7 was under pressure to roll out new policies to quell the panic in markets after its previous steps failed to do so. Instead, they outlined principles for all nations to follow.

``We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth,'' officials said.

In the past two weeks alone, global central banks executed emergency interest-rate cuts and pumped more cash into markets, the Federal Reserve said it would buy U.S. commercial paper, European governments bailed out banks and the U.K. and U.S. said they would start taking equity stakes in financial companies.

Money markets remain gridlocked even after those efforts, as banks shun lending to each other for fear they will lose the money or because they need it themselves. The resulting jump in borrowing costs is now strangling consumers and companies, prompting Merrill Lynch & Co. to predict the G-7 economies will be the weakest next year since 1982.

Stocks Slide

U.S. stocks fell for an eighth straight day, with the Dow capping its worst week since 1914. The MSCI World Index of equities in 23 developed countries slid 20 percent this week, the most since records began in 1970.

The G-7 officials shied away from endorsing a U.K. proposal to guarantee lending between banks either by turning central banks into clearing houses for the loans or having governments back them. They vowed to take steps that would give depositors confidence that their savings were safe and to restart secondary markets for mortgages and other securitized assets.

Paulson said the U.S. will buy equity in financial companies to restore market stability and ensure economic growth. He added that ``we have more to do in the liquidity area.''

The Treasury is ``working to develop a standardized program that is open to a broad array of financial institutions,'' Paulson said.

Currencies Message

While the joint statement made no mention of currencies, European Central Bank President Jean-Claude Trichet said the group viewed excess volatility in exchange rates as detrimental and urged China to allow faster gains in the yuan.

Highlighting the stakes facing the world economy, further talks to be held this weekend include a meeting of the G-7 officials with President George W. Bush, a gathering of policy makers from the Group of 20 and a summit of European leaders in Paris. Bush said today that the U.S. ``will continue to act to resolve this crisis and restore stability to our markets.''

Rifts within the G-7 were exposed by an unprecedented public split in which Italian Finance Minister Giulio Tremonti rejected a draft statement for being ``too weak.'' He said the ultimate text was very different from the original.

Earlier, Italian President Silvio Berlusconi sowed confusion by saying governments may close financial markets, only to reverse himself an hour later.

To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net; John Brinsley in Washington at jbrinsley@bloomberg.net