Finance Officials Challenged by Turbulent Economic Conditions

Sustained growth requires enhanced economic policy coordination.

Washington -- The finance ministers and central bank governors from the Group of Seven (G7) countries must address a growing credit crisis and other challenges that experts say could cause a downturn in the global economy.

Those officials are scheduled to meet in Washington on the eve of the International Monetary Fund and World Bank sessions October 19-20. The G7 comprises Canada, Germany, France, Italy, Japan, the United Kingdom and the United States.

The finance officials will have to confront a world economy shaken by uncertainty after a long period of strong and relatively stable growth. The slump in the U.S. housing market and a related crisis in the subprime mortgage market, which reverberated in European and Asian markets, have limited access to credit in some developed countries. The subprime market deals with mortgage lending to consumers that would not qualify for loans under traditional, prudential standards.

As inexpensive credit has dried up, more expensive credit could significantly slow the U.S. and global economy, experts say.

U.S. Treasury Secretary Henry Paulson said October 16 that the decline in the U.S. housing sector has not run its course yet, calling it the single biggest risk to the economy. He said, however, he expects economic growth to continue.

Dealing with current market problems will not be easy for G7 officials, says John Kirton, director of the Group of Eight (G8) research group at the University of Toronto. The G8 is the G7 plus Russia.

The fall of the subprime mortgage market and its impact on the financial sector have surprised policymakers, he told USINFO. And there are still many unknowns, he added.

Kirton expects that G7 financial officials will be cautious about reacting too strongly to the latest crisis. He said they do not want to affect negatively financial markets and financial innovation that has contributed to strong and relatively stable growth around the globe in recent years.

Treasury Under Secretary David McCormick expressed a similar sentiment October 17, saying that the G7 must act quickly, but “cannot rush to judgment.”

However, achieving a consensus G7 approach may be difficult, Nariman Behravesh, chief economist at economic analytical and consulting firm Global Insight, told USINFO.

“The perceptions of problems seem to be very different among the G7 countries,” he said.

Although they may disagree on approach, Behravesh said, the G7 officials still will seek to send a message of confidence in global financial markets.

“What they don’t want is some big disagreements that will upset the financial markets,” he said. “They still worry how fragile the situation might be.”

G7 officials also will meet with representatives of China, Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore and the United Arab Emirates that own and manage what are called “sovereign wealth funds” -- state-owned funds composed of stocks, bonds, property and other financial assets.

In recent years, sovereign wealth funds in oil-exporting countries and major trading nations such as China have grown in number and size with reserves estimated between $2 trillion and $3 trillion. While such funds at times have yielded higher returns by investing in riskier assets around the world, they also have created concerns in developed countries that such investments can be driven by political rather than economic motives.

McCormick said that if global markets are to operate effectively, the allocation of sovereign investments needs to be based on market principles and open investment regimes must be maintained.

The full texts of Paulson’s remarks and McCormick’s statement are available on the Treasury Department Web site.