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Critical week for news of sub-prime damage: G-7

Leading banks to present first audited accounts since crisis

IN TOKYO

THIS week will be critical in revealing how much damage the credit crisis has done to the global financial system, according to a key official involved in last weekend’s meeting of Group of Seven (G-7) finance ministers in Tokyo.

Leading banks will present the first audited accounts since the crisis erupted, said Bank of Italy governor Mario Draghi, who heads an international inquiry into the crisis.

Some of the world’s biggest banks have already disclosed billions of dollars of bad credits related to the US subprime mortgage market collapse but these are only preliminary estimates, said Mr Draghi, who chairs the Financial Stability Forum (FSF) working group on the crisis. ‘The next ten days will be crucial’ in revealing the true extent of the damage, he said after the G-7 meeting ended last Saturday.

‘Auditors have become more vigilant’ as fallout from the sub-prime crisis continues to spread and audited accounts for 2007 could reveal a grimmer picture, Mr Draghi told BT. The FSF report warned that ‘there remains risk that further shocks may lead to a recurrence of the acute liquidity pressures experienced last year’, adding that ‘it is likely we face a prolonged adjustment, which could be difficult’.

G-7 ministers and central bank governors shied away from any concerted fiscal or monetary actions to address the crisis at their Tokyo meeting but said that they were ‘deeply engaged in working together to strengthen financial stability, limit the impact of the financial turmoil and address the factors that contributed to it’. But even as the crisis unfolds, they recognised its growing impact on the global economy.

‘The current financial turmoil is serious and persisting,’ acknowledged US Treasury Secretary Henry Paulson after huddling with his colleagues from Japan, Canada, Germany, France, Britain and Italy. ‘There was a climate of much greater pessimism and worry than in October (when G-7 finance ministers last met) in Washington,’ added Italian Finance Minister Tommaso Padoa Schioppa.

The Tokyo meeting revealed continuing splits among finance ministers as to how far the global economy will slow under the impact of the sub-prime crisis, and what actions G-7 governments should take to combat a slowdown.

Japanese Finance Minister Fukushiro Nukaga called these ‘differences rather than discord’ and said that each country should take whatever actions are appropriate to its circumstances. But they agreed that ‘the world confronts a more challenging and uncertain environment than when we met last October’.

With spreading financial turbulence and the threat of recession looming in the world’s two biggest economies – the US and Japan – the finance and central bank officials paid little attention to issues such as exchange rates which usually dominate G-7 meetings. And, although they called on Opec countries to raise production in a bid to control spiralling oil prices, it was the shaky state of the global financial system that was at centre stage.

‘The potential exists that risk-shedding (by banks and other financial institutions) could tighten constraints on a widening set of borrowers and thereby slow economic growth, which could further impair growth,’ the FSF said in its interim report presented to the G-7. The final report on solutions to the credit crisis is due in April, when the ministers next meet in Washington.

Led by this year’s chairman, Mr Nukaga, the G-7 ministers called for greater disclosure by financial institutions of the full extent of damage to their balance sheets from the sub-prime mortgage and credit crisis. But there are growing fears the process will reveal huge holes in the capital base of global financial institutions. ‘There was a general view the need for write-offs at banks will amount to about US$400 billion,’ said German Finance Minister Peer Steinbrueck.

Mr Nukaga, meanwhile, warned his G-7 colleagues that Japan’s own financial crisis after the collapse of the bubble economy had forced authorities to inject huge amounts of public funds into toppling banks. Japan left it ‘too late’ in dealing with the situation, one senior financial source told BT.

 

Source: Business Times 11 Feb 08

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