G-20 Pledges to Tackle ‘Renewed’ Challenges

Group of 20 finance chiefs pledged to address rising risks to the global economy and pushed Europe to contain its sovereign debt crisis after concern the world is on the brink of another recession sent stocks tumbling.

Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a statement late yesterday in Washington. Many urged Europe to implement a July promise to expand the powers of its rescue fund, Japanese Finance Minister Jun Azumi said.

The previously unplanned communique suggests authorities are alert to worries among investors, while they stopped short of outlining fresh policies to buoy growth. It failed to soothe nerves as European stocks, U.S. index futures and commodities fell a day after the MSCI All-Country World Index dropped into a bear market for the first time in more than two years.

“Verbal support without any concrete action is no longer convincing,” said Joe Lau, an economist at Societe Generale (GLE) SA in Hong Kong. “Investors are now looking for viable credible actions from policy makers and, given the amount of nervousness and uncertainty out there, that may not even be enough.”

The European Central Bank may act to address risks to growth as soon as next month should economic data disappoint, Governing Council member Luc Coene said in an interview yesterday. An interest-rate cut isn’t ruled out, and the extension of long-term loans to banks is another possibility, he said.
Europe’s Pledge

The Stoxx Europe 600 Index slipped 1.6 percent at 7:04 a.m. in New York. Standard & Poor’s 500 Index futures fell 0.8 percent, after climbing as much as 1.3 percent. The MSCI Asia Pacific excluding Japan Index lost 1.8 percent. Copper slid 4.8 percent, tin sank 3.4 percent and oil dropped below $79 a barrel. The 10-year Treasury pared declines, leaving the yield at 1.73 percent.

The euro region vowed in the G-20 statement to increase the flexibility of the European Financial Stability Facility and to “maximize its impact” by the time the group next meets in Paris on Oct. 14-15. Some policy makers signaled earlier in the day they may use leverage to increase the firepower of the EFSF, which was designed to stem the sovereign-debt crisis.
‘Fragility’

The G-20 officials cited “financial system fragility” and “heightened downside risks from sovereign stresses” among the threats to growth. They said they will ensure banks are adequately capitalized and have access to liquidity, while reiterating an aversion to volatility in currency markets.

The statement was released as the International Monetary Fund and World Bank prepare to start their annual meetings today, with data this week highlighting economic weakness around the globe and the IMF cutting its forecasts for global growth this year and next to 4 percent.

U.S. consumer confidence dropped last week to its lowest point since the recession ended in 2009, and the output of European service companies and manufacturers this month shrank for the first time in more than two years. A preliminary index of purchasing managers suggested Chinese manufacturing may contract for a third month in September, the longest period in two years. FedEx Corp. (FDX), an economic bellwether delivering goods from financial documents to pharmaceuticals, cut its full-year profit forecast as demand dropped in the U.S. and Asia.
‘Danger Zone’

“The world is in a danger zone,” World Bank President Robert Zoellick told reporters. Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian warned a fresh financial crisis is brewing, and Royal Bank of Scotland Group Plc and JPMorgan Chase & Co. predicted a euro-area recession and interest rate cuts from the ECB are imminent.

European authorities have drawn the most criticism for failing to contain a debt crisis that began in Greece two years ago and has since left that country on the verge of default, Portugal and Ireland requiring bailouts, and speculators threatening to dump the bonds of Italy and Spain.

In a sign of growing international irritation, U.K. Prime Minister David Cameron and five other G-20 leaders yesterday wrote to French President Nicolas Sarkozy to demand European governments “act swiftly to resolve the euro crisis” and consider “all possible options to ensure long-term stability in the world’s second-largest international currency.” Sarkozy is the current G-20 chairman.
No ‘Blank Check’

In Washington, officials from China and Japan, the second- and third-biggest economies, indicated that their support for Europe will have limits and the region needs to solve the debt crisis itself. Japan’s Azumi said that while his nation can buy EFSF bonds if needed, there is no “blank check.”

“At the margin we can do quite a bit to help,” Chinese central bank Deputy Governor Yi Gang said in a panel discussion at the IMF. At the same time, “the real solution of the European sovereign debt crisis has to be done by Europeans themselves.”

Finance officials from Brazil, Russia, India, China and South Africa — the so-called BRICS — said in a statement they are “open to consider, if necessary, providing support through the IMF or other international financial institutions in order to address the present challenges to financial stability.”

U.S. Treasury Secretary Timothy F. Geithner predicted Europe will act “with more force” to end its troubles.
More Scope

For now, European parliaments are focused on approving a plan to widen the scope of the 440-billion euro ($593 billion) EFSF to allow it to buy the debt of stressed euro-area governments, aid troubled banks and offer credit lines. Its current role is to sell bonds to fund rescue loans for cash- strapped governments.

The ratification process, which has so far been completed by just six nations, has drawn fire from some investors for being protracted and failing to provide the fund with enough cash to prevent the turmoil spreading beyond Greece. Curbing the scope of policy makers to do more is the suspicion that taxpayers in AAA-rated countries such as Germany and Finland would balk at stumping up even more rescue money.

Speculation has grown that Europe may eventually ratchet up the fund’s spending power through leverage, with European Union Monetary Affairs Commissioner Olli Rehn and French Finance Minister Francois Baroin indicating yesterday they may be willing to do so. One proposal is for the facility to use the bonds it sells as collateral to borrow more cash from the ECB.

Another idea is to mimic a U.S. program established following the 2008 collapse of Lehman Brothers Holdings Inc. by allowing the fund to offer the ECB credit protection for buying more sovereign bonds.

“It is very important that we look at the possibility of leveraging the EFSF resources and funding to have a stronger impact and make it more effective,” Rehn said. Baroin said separately that policy makers “need the right firewall to prevent contagion” and can discuss giving the fund “the necessary strength.”