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G7 vows to fight credit crunch but details sketchy
WASHINGTON (Reuters) - The world's rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no collective course of action to avert a deep global recession.
In a surprisingly brief statement following a 3-1/2 hour meeting, the Group of Seven stopped short of backing a British plan to guarantee lending between banks, something many on Wall Street saw as a vital step to end 14 months of turmoil and growing panic on financial markets.
"The G7 agrees today that the current situation calls for urgent and exceptional action," the United States, Canada, Britain, France, Italy, Germany and Japan said.
In a separate statement, U.S. Treasury Secretary Henry Paulson said Washington was developing plans to buy equity stakes in financial institutions as a way to repair balance sheets damaged by huge credit losses.
The finance leaders agreed to use all available tools to support "systemically important" financial institutions and prevent their failure, and ensure banks can raise capital "in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses."
Analysts said the statement was unlikely to allay the sense of panic that has swept through global markets in recent weeks after Lehman Brothers tumbled into bankruptcy, triggering a wave of risk aversion that left banks hoarding cash.
The Dow Jones industrial average on Friday took a 1,000-point roller-coaster ride before ending down 1.5 percent at 8,451.19 as investors tried to pin down what might come out of the G7 gathering and other meetings of world finance officials in Washington this weekend.
"The markets wanted maybe more assurance that there would be a unified global backstopping of the banks, and it doesn't sound like that's in there," Kim Rupert, managing director of global fixed income analysis at Action Economics, said of the statement from the seven economic powerhouses.
Without credit, economic growth will collapse, and investors were looking to the G7 for a comprehensive plan to get credit flowing smoothly again. Borrowing costs spiked this week even after central banks poured hundreds of billions of dollars into markets and lowered benchmark interest rates in their broadest coordinated action in history.
"Right now, everybody's scared, they're panicking," said Mark Waggoner, president of Excel Futures Inc in Huntington Beach, California. "Unless they see action, they're still going to panic.
"Part of the problem is no matter what they (G7) do it's not going to be an instantaneous fix and everybody wants a fix that's immediate," he added. "It's just not going to happen."
Britain this week committed 50 billion pounds to recapitalize its banks and offered to guarantee interbank lending by as much as 250 billion pounds to get credit flowing again.
Britain's Chancellor of the Exchequer, Alistair Darling, had said he hoped other countries would follow Britain's plan.
U.S. Treasury's Paulson said the G7 statement was shorter than the typical communique because the entire group agreed on key points of action and wanted the message to be "different, to the point, and powerful."
"This is a period like none of us has ever seen before," Paulson told reporters after the meeting.
He said investors should feel confident knowing that all seven countries had agreed on five key steps -- to prevent the failure of important financial firms; unfreeze credit and money markets; ensure that banks have access to liquidity and funding; protect deposits; and restart mortgage markets.
Still, he acknowledged that there would be "some volatility" on financial markets for a while.
French Economy Minister Christine Lagarde said the statement showed that leaders understood the seriousness of the situation and members were ready to act to stem the crisis.
European leaders plan to meet in Paris on Sunday to discuss the crisis. The Group of 20, which also includes reserve-rich emerging economies such as China and Russia, will meet on Saturday.
The G7 members acknowledged they could no longer afford a country-by-country, case-by-case approach to crisis management after 14 months of turmoil, and agreed to stay in close contact to coordinate their actions.
"If nothing of material relevance changes over the weekend as far as the way they are going to confront the credit freeze and pending capital shortages in first tier financial institutions, I think the market will open looking south come Tuesday," said Enrique Alvarez, head of Latin America debt strategy at IDEAglobal in New York.
(For other stories on the G7, IMF and World Bank meetings, see)
(Reporting by Reuters' G7 team; Writing by Emily Kaiser; Editing by Tim Ahmann)
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