Group of Seven partners cool to U.S.-style bailouts

WASHINGTON/FRANKFURT (Reuters) - U.S. allies on Monday spurned entreaties from Washington that they enact large-scale financial bailouts, saying their banks were not exposed to the same level of reckless lending that put the American economy at risk of a deep recession.

While some European central banks offered more funding for stressed financial markets and Japan said it would offer dollar liquidity, finance ministers from the Group of Seven rich nations, who consulted by phone, issued only guarded promises to cooperate in efforts to keep market turmoil in check.

A day earlier, U.S. Treasury Secretary Henry Paulson had said he was pushing other countries to follow the U.S. effort to enact a $700 billion plan to buy up bad mortgage-related debts that are clogging the financial system.

"We are talking very aggressively with other nations around the world, and encouraging them to do similar things, and I believe a number of them will," Paulson said on Sunday.

But after Monday's conference call with G7 counterparts from Canada, Britain, France, Germany, Italy and Japan, there was no sign any of the other countries planned the same tack.

"We pledge to enhance international cooperation to address the ongoing challenges in the global economy and world markets and maintain heightened close cooperation between finance ministries, central banks and regulators," the G7 officials said in a statement.

However, they showed no appetite for mimicking the U.S. proposal.

"At the moment, I don't think Japan needs to launch a program similar to that of the United States," Japanese Vice Finance Minister Kazuyuki Sugimoto told reporters in Tokyo, echoing comments from France, Britain and Germany.

The European Union also made it clear that it would not be joining a rescue package. EU Monetary Affairs Commissioner Joaquin Almunia told a conference in Slovakia that national governments would have to decide how to proceed on their own.

Neighboring Canada came close to saying the financial mess in the United States was the Bush administration's own fault and that Washington should clean it up on its own.

"You got into a situation in the United States where unfortunately when the market makes profits, those profits go to private interests and when the market makes losses, that becomes the loss of the government," said Canadian Prime Minister Stephen Harper, who faces an election on October 14.

"We don't have that kind of a situation in Canada. We don't have a similar regulatory environment. We have much stronger systems in Canada," Harper said.

CENTRAL BANK BULWARK

Central banks in several regions pushed ahead with measures to liquify cash-starved markets and fend off the global credit squeeze.

The Bank of Japan said it would offer its first-ever dollar funding on Wednesday, drawing on a currency swap line set up last week with the Federal Reserve to pump U.S. dollars into the Japanese market.

BOJ Governor Masaaki Shirakawa said last week he did not have any particular concern about Japanese financial institutions' foreign currency funding, but he pledged to provide up to $50 billion to Japan's money markets by year-end.

The European Central Bank also held a dollar auction, allotting $40 billion in overnight funds at 3.25 percent, down from 3.50 percent on Friday and 4 percent on Thursday. However, with banks seeking $82 billion, demand was weaker than the $101 billion sought at its first-ever overnight dollar auction last Thursday.

In another auction of U.S. dollars, the Swiss National Bank allotted its full $10 billion at an average rate of 2.72 percent, down a shade from Friday's 2.78 percent, though total demand eased to $16 billion from $21 billion.

At the same time, the central bank of the United Arab Emirates launched a $13.6 billion (50 billion dirhams) emergency lending facility for banks operating in the UAE. It also said it had reviewed additional measures to provide further support to banks if required.

In Australia, the Reserve Bank of Australia pushed more than the required amount of funds into the banking system in an effort to cool soaring money rates as banks continued to hoard cash.

Despite these increasingly aggressive central bank efforts, commercial banks have been paying a hefty premium over the Fed's benchmark 2 percent funds rate, showing a wariness to accept collateral from each other.

Investors are watching the interbank lending market as a barometer for a broader market recovery. The longer interbank rates stay high, the more they will push up the cost of business and consumer lending, strengthening the economic headwind.

"Things are not normalizing quickly, but in the overnight market some semblance of normality is returning," said David Keeble, head of fixed-income strategy at Calyon.

Overnight dollar Libor rates -- a benchmark of market conditions -- fell to 2.96875 percent on Monday from 3.25000 percent on Friday.

Speaking in Slovakia, ECB President Jean-Claude Trichet said: "Central banks are acting and ... appropriate decisions were taken in the supply of liquidity in our various currencies in order to be up to the exceptional period that we have."