G-7 Commit to `All Necessary Steps' to Stem Global Meltdown

By Simon Kennedy

Oct. 11 (Bloomberg) -- Group of Seven finance chiefs, meeting after stocks plunged and as a global recession looms, vowed to prevent the failure of vital banks while failing to unveil new initiatives for thawing credit markets.

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

Signaling they would intervene to avoid a repeat of last month's collapse of Lehman Brothers Holdings Inc., the officials promised to ensure major banks have access to cash and are able to tap public funds for capital. By refraining from specific fresh measures such as embracing a U.K. plan to guarantee loans between banks, they still run a risk of disappointing investors.

``They've seen what Lehman did and the repercussions,'' said Jeff Pantages, chief investment officer at Alaska Permanent Capital Management in Anchorage, which oversees $2 billion. ``If you're a bondholder, you've got to feel better. If you're a shareholder, you're not so sure.''

Lehman's downfall precipitated the latest chapter of the 14-month crisis, causing banks to stop lending to each other out of concern they may not get their funds back. The G-7's willingness to now back ``systematically important financial institutions'' may provide some relief for Morgan Stanley, whose stocks and bonds dropped this week on concerns for its health.

Bank Discussions

U.S. Treasury Secretary Henry Paulson said no bank was singled out in the discussions yesterday.

The policy makers 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.

The G-7 nations were under pressure to roll out new policies and adopt a united front to quell the panic in markets after their previous steps failed to do so. Instead, they outlined principles for all nations to follow.

Measures taken should protect taxpayers and avoid ``potentially damaging effects on other countries,'' the group said. In the past month, European countries have taken unilateral actions to increase bank-deposit guarantees, spurring concern that savers would drain cash from nations with less protection.

Paulson said it would be ``naive'' to think that different nations in different circumstances could come up with the same policy paths.

Emergency Actions

In the past two weeks, global central banks executed emergency interest-rate cuts and pumped more cash into markets, the Federal Reserve said it would buy 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 so, with the three- month London interbank offered rate climbing to 4.82 percent yesterday, a record premium over the Fed's benchmark rate. The seizure spurred British policy makers to propose a program to backstop loans between banks.

G-7 officials shied away from the U.K. idea, which would either turn central banks into clearing houses for banks' loans or have governments back the obligations.

The jump in borrowing costs and restricted access to credit prompted Merrill Lynch & Co. to predict the G-7 economies next year will be the weakest since 1982.

Stock Slump

U.S. stocks fell for an eighth straight day yesterday, with the Dow Jones Industrial Average 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.

Policy makers expressed confidence that investors will ultimately recognize the scale of actions under way, including a new U.S. plan to buy stocks in a ``broad array'' of financial companies.

``We have taken a lot of actions,'' European Central Bank President Jean-Claude Trichet said. ``My experience of markets is that it always takes a little time to capture the elements,'' of the decisions taken, he said.

Paulson signaled his top priority is getting his plan to buy financial stocks running as soon as he can. ``This is a plan that I'm quite confident will work,'' he said. The Treasury chief also said ``we have more to do in the liquidity area.''

The American plan follows U.K. Prime Minister Gordon Brown's 50 billion pound ($87 billion) program that will partly nationalize at least eight lenders.

Canadian Plan

Canada's government yesterday moved to shore up its banks by saying it will buy as much as C$25 billion ($21.6 billion) in mortgages from them. German Finance Minister Peer Steinbrueck and Bundesbank President Axel Weber said they're working on a package of measures to rescue banks that'll be revealed before markets open next week.

``The situation in financial markets is demanding unusual and far-reaching decisions from all policy makers,'' Weber told reporters. ``There is no alternative to these measures because banks have come under strong pressure.''

While the joint statement made no mention of currencies, 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 will be held this weekend. The G-7 officials will meet today with President George W. Bush and gather with counterparts from the Group of 20, which includes emerging markets.

European Summit

Trichet will head to Paris for a summit of European leaders tomorrow that French Finance Minister Christine Lagarde said will seek to go ``beyond'' the G-7's agreements.

Rifts within the G-7 were exposed by an unprecedented public split in which Italian Finance Minister Giulio Tremonti rejected a draft statement yesterday for being ``too weak.'' The ultimate text that won his blessing was shorter than the original and aimed at wielding ``a strong psychological impact,'' Lagarde said.

Tremonti after the meeting described the Basel II accord that regulates accounting for banks as ``dead'' and said he will propose a shake-up of global financial architecture today. The G-7 promised to implement ``high-quality accounting standards.''

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