April 13, 2008 / 6:52 PM / 11 years ago

World leaders show unity as credit crisis drags on

WASHINGTON (Reuters) - World finance leaders concluded a whirlwind weekend with a new plan to clean up banks and fresh resolve to rein in foreign exchange markets, but little hope that the credit crisis was nearing an end.

World Bank President Robert Zoellick (L) talks to International Monetary Fund Managing Director Dominique Strauss-Kahn at the beginning of the Development Committee session during the last day of the spring IMF-World Bank meeting in Washington April 13, 2008. REUTERS/Yuri Gripas

Soaring food prices pushed inflation concerns to the forefront as the World Bank warned of an impending humanitarian crisis that could undo years of poverty-reduction efforts.

The International Monetary Fund predicted a U.S. recession that would exact a hefty toll on global growth, while leaders of the Group of Seven rich nations resorted to tougher talk to try to prop up the ailing U.S. dollar.

With the U.S. economy dangerously close to — if not already in — a recession and the deflating dollar spreading economic pain worldwide, usual hot-button issues such as China’s growing clout were pushed to the side as the G7, IMF and World Bank held their back-to-back meetings here.

“It’s not over yet,” U.S. Federal Reserve Vice Chairman Donald Kohn said, summing up the uncertainty surrounding the financial market turmoil that has raged for eight months.

While there was plenty of agreement on what ails the global economy, finding a cure was trickier. The G7 endorsed a report from the Financial Stability Forum that spelled out dozens of reforms needed from global banks and regulators.

Wall Street largely dismissed the proposals as cosmetic changes that would do little to fix the current crisis. Banks have already written off some $225 billion in bad debts tied to failing U.S. subprime mortgages and other loans. The IMF estimated that total losses may near $1 trillion once insurers and others add in their final tally of the damage.

“All the bad news has not come out yet,” Italian Economy Minister Tommaso Padoa-Schioppa said.


Perhaps the biggest surprise from the weekend’s events was the stark warning from the G7 that volatile foreign exchange markets posed a threat to economic and financial stability. It was the strongest signal since 2000 that world leaders were unwilling to stand idly by as the dollar dropped.

The worry is that the weak U.S. currency is contributing to global inflation, hampering consumer spending and complicating policy decisions for central bankers who might otherwise lower interest rates further to avert a serious economic downturn.

The tougher talk led to speculation on whether world leaders were planning a more direct intervention into currency markets to stem the dollar’s decline. When asked about the change in tone, French Economy Minister Christine Lagarde said, “The markets will tell us if it is enough.”

That suggests world leaders will be paying close attention to currency market movements in the coming weeks.


The fate of the U.S. economy colored virtually every discussion. While U.S. and European leaders objected to the IMF’s grim economic assessment, they could offer no assurances that things were getting better.

Indeed, in the G7’s statement following its meeting on Friday, it said economic prospects had weakened since the last gathering in Tokyo just two months earlier.

The IMF’s steering committee, made up of finance ministers and central bankers from 24 countries, echoed that sentiment and called for close global cooperation.

“Risks to the outlook come from the still-unfolding events in financial markets and from the potential worsening of housing and credit cycles,” the IMF’s committee said. “Inflationary risks — notably from higher food, energy, and other commodity prices — have also risen.”

Those price pressures were showing up around the world in the form of food riots in Haiti, rising exports costs from China, and tougher wage negotiations in Europe.

World Bank President Robert Zoellick held up a piece of bread at a press conference to illustrate his point that inflation threatened starvation in developing countries.

“While many are worrying about filling their gas tanks, many others around the world are struggling to fill their stomachs, and it is getting more and more difficult every day,” he said.

Editing by Andrea Ricci

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