Geithner Pressed By G-7 to Move Fast on Bank Bailout

By Simon Kennedy and Rebecca Christie

Feb. 16 (Bloomberg) -- Finance chiefs from the Group of Seven nations joined the chorus of U.S. investors and lawmakers pushing Treasury Secretary Timothy Geithner to move faster to fix the banking system.

Stung by domestic criticism for failing to provide details last week on just how he plans to clean up banks’ toxic assets and revive lending, Geithner was told by foreign policy makers at weekend talks in Rome that speed was of the essence.

“A concrete U.S. plan would have positive spillover effects on markets and economies elsewhere,” said Marco Annunziata, chief economist at UniCredit MIB in London. “They are also probably hoping Geithner unveils the magic formula, which they could then also adopt.”

The G-7 finance ministers and central bankers want Geithner, 47, to tackle a U.S. credit crisis that lies at the heart of the worst global recession since World War II. Bank stocks, as measured by the Standard & Poor’s 500 Financials Index, have fallen 30 percent this year and ended last week lower than before Geithner presented his rescue plan on Feb. 10.

“The question is implementation and execution,” Bank of Canada Governor Mark Carney said in Rome on Feb. 14 after Geithner’s first trip abroad as Treasury secretary. “It is a comprehensive plan, the intent is there, the will is there.”

‘Second Wave’

The G-7 said the “severe” downturn will persist through 2009 and International Monetary Fund Managing Director Dominique Strauss-Kahn predicted a “second wave” of nations will ask for emergency cash as state finances crumble.

As German Finance Minister Peer Steinbrueck complained that the U.S. was the “departure and focal point” of the slump, a U.S. official in Rome promised more information on Geithner’s intentions within weeks. President Barack Obama will this week unveil his strategy to end the housing slump.

“We are going to move quickly to lay out a broad design,” Geithner said in Rome. The G-7 officials will gather again in the U.K. next month for a meeting of the Group of 20, which includes the largest emerging nations such as China, India and Brazil.

Economic prospects are still deteriorating. Japan’s economy, the world’s second largest, shrank at an annual 12.7 percent pace in the fourth quarter, the most since the 1974 oil shock, the government said today. Companies from Microsoft Corp. to Nissan Motor Co. are cutting jobs, U.S. stocks fell last week by the most since November, and the World Bank said Feb. 13 the crisis may kill as many as 400,000 more babies every year until 2015 as poverty spreads.

Priority Is Stability

“The stabilization of the global economy and financial markets remains our highest priority,” the G-7 officials said after their meeting. They forecast the full effect of individual rescue packages will “build over time.”

The group said it rejected protectionism even amid signs some of its members are shielding their industries to the detriment of rivals. The statement softened previous calls for China to accelerate gains in its currency by saying it welcomed the country’s steps to bolster growth. That should help “lead to a continued appreciation” of the yuan, the G-7 said.

“This is clearly friendlier language with a toned down emphasis on the need for further appreciation,” said Ronald Leven, a currency strategist at Morgan Stanley in New York. “This gives the Chinese some latitude to allow the currency to remain stable.”

Geithner won over some foreign colleagues this weekend who had previously expressed confusion over how exactly he plans to fix the U.S. banking system.

‘Looks Great’

French Finance Minister Christine Lagarde, who arrived saying she was “very impatient” for more details, said Geithner answered questions “very clearly.” Steinbrueck, who clashed with the previous U.S. administration over regulating the financial industry, suggested Geithner is more aligned with his views.

Geithner’s plan “looks great,” said Lagarde. “The essential thing is now to implement it.”

The strategy involves injecting fresh government capital into some of the biggest U.S. institutions, starting a program of up to $1 trillion to promote new lending to consumers and businesses, and establishing a public-private partnership to buy tainted assets.

Geithner had a challenge for the rest of the G-7, too, urging them to follow the U.S.’s lead in enacting aggressive policies to rally their economies. The G-7 meeting took place as the U.S. Congress gave final approval to a $787 billion economic stimulus package.

‘Greater Urgency’

“Given the severity of the current economic and financial environment, these actions must be forceful and sustained for a period that matches the likely duration of the crisis,” Geithner said. He noted “a much greater scale of urgency and commitment” within the G-7.

Still, European Central Bank policy makers at the meeting signaled they are in no rush to follow the Federal Reserve in pursuing more non-conventional monetary policies. Carney said in an interview that the relative strength of Canada’s banks meant recent interest-rate cuts will be more effective there than elsewhere.

Aside from the yuan, which Geithner said less than a month ago was being “manipulated,” the G-7 made no mention of other currencies, papering over differences sparked by a weaker pound and stronger yen. The group repeated its traditional message that “excess volatility” in exchange rates must be avoided.

The yen climbed to 91.64 against the dollar as of 7:19 a.m. in London from 91.93 late in New York on Feb. 13. The pound fell 1.2 percent to $1.4178.

“The overall tone appeared to serve the principal aim of not generating additional market volatility,” said Thomas Stolper, an economist at Goldman Sachs Group Inc. in London.

The G-7 tasked its aides with delivering a report within four months on common principles and standards on the “propriety, integrity and transparency” of the world economy and markets. The G-20 next month will push ahead with new rules to govern finance.

“This is of capital importance,” Italian Finance Minister Giulio Tremonti said in an interview.

To contact the reporter on this story: Simon Kennedy in Rome at skennedy4@bloomberg.net