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G7 signals worst of world recession may be over

WASHINGTON (Reuters) - Finance chiefs from the G7 powers said on Friday the global economy may be pulling out of the depths of a recession although recovery was not yet assured, and they pledged to make certain big financial firms are sound.

Group of Seven finance ministers and central bankers said after their meeting that economic activity should begin to recover later this year. However, the outlook remained weak and there was a risk that the global economy may still worsen.

“We are right to be somewhat encouraged, but we would be wrong to conclude that we are close to emerging from the darkness that descended on the global economy early last fall,” U.S. Treasury Secretary Timothy Geithner said in a statement.

It was a less dire assessment than the G7 delivered at its last official gathering in February, when leaders warned that the severe downturn would persist through most of 2009 and made no mention of promising signs of stability.

“Recent data suggest that the pace of decline in our economies has slowed and some signs of stabilization are emerging,” the G7 said in a closing communique.

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“We will continue to act, as needed, to restore lending, provide liquidity support, inject capital into financial institutions, protect savings and deposits and address impaired assets. We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions,” the statement said.

“Signs of stabilization, that’s also an expression with a question mark. But we understand that the G7 statement has indirectly expressed the view that the worst may be possibly over for the world economy,” said Japanese Finance Minister Kaoru Yosano.

The G7, which comprises the United States, Britain, Canada, France, Germany, Italy and Japan, met a day before the International Monetary Fund and World Bank begin their twice-yearly meetings. The larger G20 group, which includes emerging economies such as China and India, began its meeting after the G7 and Geithner said the agendas would be similar.

“The agenda will be: What are we doing? Are we doing enough to help attenuate the risks in this recession, lay the foundation for an earlier recovery, lay the foundation for a more balanced, more sustainable recovery?” he said.

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The G7 has been under growing pressure to speed up efforts to rid banks of bad assets that have constricted the flow of credit and plunged the global economy into its deepest recession since World War Two.

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The International Monetary Fund urged rich nations to prioritize repairing the financial sector because the world economy cannot fully recover unless credit is flowing.

“The IMF is absolutely right when it asks countries to deal with toxic assets because transparency is crucial for recovery,” said Mario Draghi, head of the Financial Stability Board, a newly fortified group designed to coordinate global regulatory reform.

U.S. regulators have put 19 of the largest banks through stress tests to assess whether the government will have to pump more money into them. Geithner said the results of the stress tests were not discussed at the G7 meeting.

The Federal Reserve released a paper on Friday outlining the methodology of the tests, and said banks needed to hold substantially more capital than is usually required to weather a potential worsening of the recession.

Canadian Finance Minister Jim Flaherty, who has expressed frustration over the slow pace of progress in fixing the banks, said after the G7 meeting that he was pleased with U.S. and British efforts to implement their bank repair plans.

“We’re going in the right direction,” he said.

With attention firmly focused on the banking sector, the G7 made no changes to its closely watched statement on currency markets, repeating its February caution that excess volatility and disorderly movements in exchange rates were unwelcome.

Reporting by G7 team; Writing by Emily Kaiser and Glenn Somerville; Editing by Chizu Nomiyama