EUR updates
E.U. Finance Ministers Deliberate On Impact Of Financial Turmoil; Call For Stricter Bank Regulation
Monday, April 07, 2008 2:29:55 AM - European Union finance ministers at their two days talks in Brdo, Slovenia, said on Friday that financial turmoil will continue to affect the E.U. economies through 2009 and called for `full and immediate disclosure` by the bloc`s banks and a coordinated response around the world to tackle the financial crisis.
At the meeting, the finance chiefs however said the impact of the financial turmoil has so far been contained but warned that credit squeeze increasingly threatens to undermine European growth due to the cost of borrowing euros scaling new heights since December last week.
The ministers also agreed to tighten the oversight of banks and urged bankers to come up with a factual picture of the losses they face as a result of the meltdown in the U.S. subprime-mortgage market.
The euro zone finance ministers and central bank authorities, also laid out the groundwork for the creation of cross-border groups in a bid to tackle financial crises that could have potential repercussions outside of a country`s jurisdiction.
`As far as the central banks are concerned, they have the possibility in case there are problems that are acute, to embark in what we call ELA, or emergency liquidity assistance,` said European Central Bank President Jean-Claude Trichet, introducing the new agreement.
Trichet said the measures to be overseen by regional central banks, would involve borrowing against a range of collateral that should not include any risk to taxpayers.
Ahead of their meeting with G-7 leaders in Washington on April 11, the world`s top central bankers are pondering over new methods of boosting liquidity, said Trichet. The ECB President said he continues to see on the money market a level of tension.
`If market-led solutions prove inadequate, we stand ready to consider regulatory alternatives,` the finance ministers said in a statement. They also dismissed concerns about the euro`s 17 percent jump against the dollar in the past year.
Slovenian Finance Minister Andrej Bajuk, who headed talks in Brdo between the 27 nations, said `downside risks` are starting to have an impact in the real economy mainly due to higher oil and food prices. He said a strong political agreement had been reached, and that cross-border stability was necessary going forward.
In his concluding remarks Bajuk said governments were continuing to call on banks to make `full and immediate disclosure` of losses such as those from complex investments based on the U.S. subprime housing market. This would help cushion the impact that the economy will face this year and next year, he said, when a `moderate slowdown` was likely to be witnessed.
Reiterating that the European economy, is in a good situation due to the sound foundations and the lack of macroeconomic and financial imbalances, Bajuk said the negative spill-over from the financial turmoil had been contained and the E.U. was on target to implement a `comprehensive roadmap` to tackle the present turmoil and immunize the E.U.`s financial system by the end of 2008.
The roadmap besides aiming to improve transparency for investors, markets and regulators, also seeks to upgrade valuation standards for complex investments, reinforce risk management in the financial sector and reform credit rating agencies.
Bajuk said the agencies, who were held partly responsible for the recent credit crisis after some of them rated risky debt as good, had pledged to improve the credit-rating process and tackle possible conflict of interest issues as they are paid by the banks whose debt they rate.
Italian Finance Minister Tommaso Padoa-Schioppa has reportedly told Bloomberg that the outlook on successive forecast seems less favorable and we have to accept this fact. He said the general sentiment is that the turmoil is not over, and that there is still possible bad news in the offing.
The body blow has led banks to be choosy and lend only to the safest borrowers, forcing the euro interbank offered rate, or Euribor, to rise to 4.74 percent last week.
E.U. Economic and Monetary Affairs Commissioner Joaquin Almunia added that the totality these measures would help `as much as possible avoid the transmission of these market turbulences to the real economy, which is what we all want.`
Meanwhile, Central bankers attending the Brdo talks expressed concerns that the highest European inflation rate in almost 16 years remains a barrier to lowering interest rates. The ECB`s Governing Council is expected to meet on April 10. Economists widely believe that the Central Bank would leave the benchmark rate unchanged at 4 percent.
With the IMF forecasting global growth of 3.7 percent this year and next, the weakest since 2002, the European delegation at the G-7 meeting this week will urge their counterparts for greater coordination in tackling the credit crisis.
The European document says `It is important to coordinate global responses, not least within the G-7, to the challenges the world economy is facing in terms of financial-market turbulence.`
`Authorities must remain vigilant to further policy responses that may be needed, in particular aimed at stemming mechanisms with a potential to amplify the effects of the turmoil.`
E.U. Supports Far-Reaching IMF Reforms
E.U. finance ministers also utilized their meeting at Brdo to prepare the groundwork for the Spring International Monetary Fund meeting scheduled for April 12-13 in Washington.
At the meeting the 27-nation bloc is to support the resolution of the IMF`s Executive Board on quotas and voice reform, where European nations will accept a lower voting quota and give poorer countries a greater say in the multilateral institution`s decision making, the Slovenian presidency said.
`The IMF further needs to boost its legitimacy by making sure that all members are adequately represented and that a new budget system is created, with a new model for income,` the E.U. presidency said.
The finance chiefs said they were `fully committed to reach an outcome that enhances the legitimacy of the IMF by ensuring a fair and adequate representation for all members.`
Under the reforms, the voting share of developing countries would increase from 39.4 percent to 42.1 percent while Europe, the United States and Japan will lose some of their voting weight.
While supporting the budget reductions envisaged by the Washington-based fund and steps to decrease expenditure, the E.U. ministers said the IMF should find new ways to fund itself in future as it`s returns from billion-dollar loans lent nations that faced financial crisis are negligible.
