G7 nations try to halt slide to depression

By Janet Bush, London Times, 5 October 1998

FEAR of a meltdown in world stock markets and a decline into 1930s-style economic depression has pushed the world's leading finance ministers into making an unprecedentedly strong demand for an urgent and coordinated response to the current turmoil.

The Group of Seven industrialised nations is calling for immediate interest rate cuts and a rapid move towards the creation of a new international authority that would act to avert any future economic collapse.

In an effort to halt the panic that set in on world stock markets last week, Gordon Brown, the Chancellor of the Exchequer, said that the world's major powers were now co-operating to boost international demand, restructure financial systems and provide help for the victims of the world financial crisis.

Today, a wider grouping of representatives from 22 countries, the Willard Group, will meet in Washington to add their weight to the effort to stabilise the world economy.

Hopes are rising that this week's meeting of the Bank of England's Monetary Policy Committee will bring a cut in British interest rates. Eddie George, Governor of the Bank of England, made it clear yesterday that his committee will pay close attention to the call in the G7 communique for rate cuts.

The raft of job losses hitting Britain is prompting increasingly vociferous calls for lower rates. But Gordon Brown said yesterday that he would not be using his emergency powers to intervene: the decision on rates would rest with the bank committee.

As the world economies feel the effect of the Asian crisis, they are now launching a series of initiatives to help bail out the worst hit countries. Japan is to put up a $30 billion fund to help Asian economies hit by the currrency crash to start to expand their economies again. Dominique Strauss-Kahn, the French finance minister, said last night that France would put up extra funds for the IMFemergency aid packages until President Clinton persuaded Congress to put up the US share.

The IMF is already working on a $30 billion aid package to stop the Brazilian economy collapsing, with disastrous effects for the US. There is US investment of $39 billion in Brazil, most of it by banks which are already battered by losses sustained in Asia, Russia and, most recently, the Long-Term Capital Management hedge fund crash.

Finance ministers and central bank governors, badly rattled by the negative reaction on Wall Street to last week's cut in interest rates by the US Federal Reserve, were acutely aware of expectations in the financial markets for concrete action and feared the reaction if there was none.

Gordon Brown, the Chancellor, said they had agreed on a common approach both to fire fighting in the short-term and also to working intensively on reforming the management of the world financial system for the long term.

The ministers asked Hans Tietmeyer, president of the Bundesbank, to examine proposals for a global board of financial regulators.

In a sour note that will worry markets, however, Mr Tietmeyer went out of his way to say that the German economy was expanding healthily on the strength of domestic demand and no longer needed any help from outside. This will raise fears that the Bundesbank and its successor the European Central Bank will not be keen to join in interest rate cuts.

There was an unusually forthright demand for Japan to tackle problems in its banking system, on a tight timetable and using public money, still a controversial proposition in internal Japanese politics. Europe was urged to do all it could to promote growth as well as to tackle high unemployment although nobody appears to be hoping, at this stage, for a German rate cut to ensure that European rates converge downwards to a lower level.

Britain was put in the same category as America and Canada, both of whom cut interest rates last week, and was urged by the G7 to take appropriate action to maintain conditions for sustainable growth, communique code for cutting interest rates.

The Chancellor said that the most concrete progress on various ideas to reform the way the world monetary system was managed came on his own proposal for a new permanent committee of international regulators including the IMF, the World Bank and securities and banking regulators.

President Clinton's call for a new emergency financing facility within in the IMF, which received blanket coverage in the American press, has little chance of making progress until Congress votes on releasing higher American contributions due last year.

In interviews Mr Brown strongly hinted that he expected to see interest rates coming down this week. He said on BBC Radio: A few days ago the federal reserve lowered their interest rates, Canada lowered their interest rates, the Bank of England itself has said that the balance of risk has shifted.

William Hague, the Tory leader, said Mr Brown cut a pathetic spectacle going round the world calling for interest rates to be cut when he couldn't do it here because he had yielded the power.

Shadow Chancellor Francis Maude said it was time Gordon Brown stopped saying this is all someone else's fault and acknowledged that specific problems had been created in specific countries where the economy had been run badly.