Leaders Differ on Financial Crisis as Summit Planned

By Michael McKee and Simon Kennedy

Oct. 22 (Bloomberg) -- World leaders, facing financial markets in turmoil and the possibility of global recession, will discuss ways to fix the crisis at a summit meeting in Washington next month.

U.S. and European leaders, sparring over the causes of the credit crunch and how to cure it, don't expect to reach consensus on what steps to take. Instead, the Nov. 15 summit may produce only an agreement to hold additional meetings.

``Everybody will come with their own ideas,'' White House spokeswoman Dana Perino said. ``Not everybody will have the same solution.''

President George W. Bush, responding to calls from French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown, invited leaders from the so-called Group of 20 industrialized and developing nations to attend the summit almost two weeks after the U.S. presidential election.

Stock markets around the world have tumbled this year, with declines accelerating as banks all but ceased lending in recent weeks. Since the U.S. investment bank Lehman Brothers Holdings Inc. declared bankruptcy Sept. 15, the Standard & Poor's 500 index has fallen 28 percent, the U.K.'s FTSE 100 is down 25 percent, Germany's DAX 27 percent, and Japan's Nikkei 225 has dropped 29 percent.

Brown wants greater cross-border oversight of banks and other financial firms. ``We must now take action on the global financial recession,'' he said in Parliament today, ``because no country can insulate itself from it.''

Sarkozy's Goal

Sarkozy has called for much stricter government supervision of financial markets and their participants. He said today his goal is to ``reform the international financial system and ensure that the current crisis won't repeat itself thanks to a better regulation.''

Perino, however, suggested the Bush administration is more interested in a discussion of ``principles'' for prudent country- by-country regulation.

And the Financial Services Roundtable, which represents 100 of the largest U.S. banking, insurance and investment companies, said while it supports the idea of international regulatory guidelines for capital standards and consumer protection, the application of those principles should be left to each individual country. ``We live in a global economy,'' said Roundtable President Steve Bartlett.

Safety Net

Jeffrey Sachs, director of Columbia University's Earth Institute in New York and a longtime adviser on economic and fiscal issues to governments worldwide, said the leaders' first goal should be to mitigate the effects of a global recession.

The G-20 should encourage looser fiscal policy in Asian countries such China, South Korea and Japan to stimulate international trade and demand. And the leaders should use their central banks to provide a safety net for banks in emerging- market nations that ``might face a threat to liquidity through no fault of their own,'' he said.

Low interest rates through much of this decade led banks and investment houses around the world to make loans that have since soured. Many of those loans were packaged into other securities, which have also gone bad, forcing financial institutions to write down billions of dollars in assets.

That has led to the worst worldwide credit crunch since the Great Depression. The International Monetary Fund this month forecast global growth would drop to 3 percent next year, which the lender calls the dividing line between global recession and expansion.

Recalling Bretton Woods

European leaders have said the fallout justifies major changes in the way financial institutions are regulated. Sarkozy, 53, has compared the effort to the 1944 Bretton Woods conference in New Hampshire that fixed exchange rates, hitched the world to the gold standard and created the International Monetary Fund and World Bank.

The talks, he said, should aim to impose stricter regulation on financial institutions, curb bonus packages for bankers, overhaul international accounting rules and reshape policies on foreign exchange rates.

``We must reform capitalism so that the most efficient system ever created doesn't destroy its own foundations,'' Sarkozy, whose country now holds the presidency of the 27-nation European Union, said last week.

Brown, 57, has lobbied placing the world's top 30 banks under the supervision of a panel of regulators.

Preserving Capitalism

Bush, 62, said Oct. 18 any reforms must preserve the free- market system and the free flow of trade and investment.

``It is essential we preserve the foundations of democratic capitalism,'' he said.

The differences suggest little may be accomplished, said Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh. He chaired a congressional commission that studied the international financial system in 2000 after the Asian financial crisis.

``International agreements like Bretton Woods require a fairly large amount of international cooperation and agreement on goals,'' Meltzer, 80, said. ``That isn't present.''

Julian Jessop, chief international economist at Capital Economics Ltd. and a former U.K. Treasury official, also said he was skeptical about what the summits could accomplish.

``What's worked well in the last few weeks is individual countries have come up with their own solutions for the credit crunch and best practices have emerged that others can copy,'' Jessop said. ``It's a global problem, but maybe it's best for countries to come up with their own end.''

Today's Challenges

Sachs, 54, said the meetings would have long-term value only if they are broader than the leaders have suggested so far. The financial architecture put in place at Bretton Woods, designed to deal with the aftermath of World War II, should be replaced by international institutions set up to deal with today's problems, including energy, the environment, climate change, and poverty.

``We need financial institutions that make sense for the challenges we're facing,'' he said, ``not just an effort to fight the last war, which is what financial regulation would do.''

While both U.S. major-party presidential nominees have been informed of plans for the summit, Perino said it's too early to say whether the president-elect would attend. ``We will look for his input after the election'' on Nov. 4, she said.

Democratic presidential nominee Barack Obama said he has advocated for such a summit, but he told reporters in Richmond, Virginia, it would be presumptuous to say ahead of the election whether he would attend. ``We have only one president at a time,'' Obama said today.

`Important Opportunity'

Republican presidential candidate John McCain sees the summit as ``an important opportunity'' for world leaders to share ideas and information, senior economic adviser Doug Holtz-Eakin said in a statement.

The Group of 20, created as a response to the financial crises of the late 1990s, includes finance ministers and central bank governors from the G-8 industrialized nations as well as developing nations.

G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

Others invited include International Monetary Fund managing director Dominique Strauss-Kahn, World Bank President Robert Zoellick and United Nations Secretary General Ban Ki-moon.

To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net; Simon Kennedy in Paris at Skennedy4@bloomberg.net