Ghost of Lehman Haunts G-7

Finance chiefs face calls to ramp up efforts to resolve debt crisis.

Europe’s finance chiefs face international calls today to accelerate efforts to contain their debt crisis as mounting bets on a Greek default highlight the biggest threat to the global economy.

As central bankers and finance ministers from the Group of Seven nations convene in Marseille, France, for their first face-to-face talks since they promised “coordinated action” Aug. 8 to calm financial markets, Europe’s failure to stamp out investor worries over sovereign debts are set to be the focus.

Any global recession “will have Europe’s fingerprints on it,” said Constance Hunter, who helps manage about $12 billion as chief economist at Aladdin Capital Management LLP in Stamford, Connecticut. “Europe is the real risk.”

It’s not the only risk as policy makers race to head off a recurrence of the contraction, the worst since the Great Depression, that followed the collapse of Lehman Brothers Holdings Inc. three years ago this month. The Organization for Economic Cooperation and Development yesterday said the G-7 will barely expand in the final quarter as the euro region shrinks.

Every G-7 member is fighting on multiple fronts to prevent the slowdown from turning into a global slump. Central bankers are signaling easier monetary policy. President Barack Obama last night announced a $447 billion plan to cut the 9.1 percent jobless rate. Japan is struggling to prevent a stronger yen from undermining exports. Benchmark interest rates are already at record lows and public debt at unprecedented highs.

‘Getting Worse’
“Things are getting worse and the big difference between now and a few years ago is that this time around we’re running out of policy bullets,” Nouriel Roubini, chairman of New York-based Roubini Global Economics LLC, said in a Sept. 6 interview. “There is a 60 percent probability of another economic contraction in most advanced economies.”

Credit-default swaps on Greek debt yesterday surged to a record, signaling a 91 percent chance the nation will fail to meet debt commitments, and the cost of insuring against default on European corporate debt climbed today. A measure of banks’ reluctance to lend to each other in Europe this week rose to the highest in almost 2 1/2 years and about $5 trillion has been wiped off global equity markets since the start of July as debt fears rippled around the world.

Orders Slump
Texas Instruments Inc., the largest maker of analog chips, said yesterday that third-quarter sales may fall short of forecast, citing a slump in orders for electronics components from customers across its product lines. Profit will be 56 cents to 60 cents a share on revenue of $3.23 billion to $3.37 billion, the Dallas-based company said. Analysts on average had estimated profit of 60 cents on sales of $3.5 billion, according to Bloomberg data.

Officials arriving for the gathering share the view that Europe needs to do more to put its financial house in order.

U.S. Treasury Secretary Timothy F. Geithner will urge Francois Baroin and Wolfgang Schaeuble, his French and German counterparts, to take “more forceful action” to protect banks and ensure governments can borrow at sustainable interest rates, according to an opinion piece in the Financial Times yesterday.

International Monetary Fund Managing Director Christine Lagarde today reiterated the need for some banks to be recapitalized and for officials not to “underestimate the risks of a further spread of economic weakness, or even a debilitating liquidity crisis.”

IMF Communication
Lagarde may use the talks to step up the IMF’s “communication in terms of trying to find support as far as growth is concerned,” Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc, said in a radio interview on “Bloomberg Surveillance” with Tom Keene.

Morgan Stanley economists led by Joachim Fels told clients Sept. 7 that with fiscal policy tapped out and a “negative feedback loop between weak growth and soft asset markets,” central banks may ease monetary policy in lockstep as soon as this weekend.

Underscoring the growth concerns, European Central Bank President Jean-Claude Trichet yesterday cited “particularly high uncertainty and intensified downside risks” to the economy. Federal Reserve Chairman Ben S. Bernanke said hours later that U.S. policy makers will this month discuss the tools they could use to boost the recovery and stand ready to use them.

Franc Ceiling
Elsewhere, the Swiss National Bank on Sept. 6 imposed a ceiling on its franc after it soared to a record against the euro, damaging exports, as investors sought a haven from Europe’s woes. Central banks from Brazil, Canada, Sweden, Australia and the Czech Republic this week indicated a willingness to keep monetary policy loose.

The G-7 officials meet in the southern French port tonight and tomorrow. While there will be no formal statement, Baroin will brief reporters after the talks end at 2:15 p.m. tomorrow. In their joint comment last month, they vowed to “take all necessary measures to support financial stability and growth” after a U.S. sovereign-rating cut and a slide in Italian and Spanish debt.

The policy makers gather as the euro area’s debt turmoil continues to defy remedies almost two years since it began in Greece. It required bailouts in Portugal and Ireland and last month forced the ECB to buy Spanish and Italian government bonds to stem a market rout.

Unrest, Divisions
Dogged by voter unrest and ideological splits, Europe’s leaders are adding to investor unease as they argue over the terms of bailouts, with Finland demanding collateral from Greece and German lawmakers seeking veto power. They have also dithered over a revamp and management of their regional rescue fund and fallen short of the closer fiscal ties investors say are necessary to protect the euro’s long-term future.

Sixty-four percent of fund managers surveyed by BofA- Merrill Lynch last month identified Europe’s debt crisis as the world’s biggest risk, up from 43 percent in July. That contrasts with three years ago this weekend when European finance ministers gathered along the same coast, in Nice, took aim at the U.S. for destabilizing the world economy. Days later they began criticizing the U.S. for letting Lehman fail.

As then, the danger is one economy’s woes are transmitted either by hurting global trade, slamming bank balance sheets or freezing financial markets, said Jim O’Neill, chairman of Goldman Sachs Asset Management.

“You could spend the last decade focusing on the U.S. and China and not really worry about anything in Europe,” said O’Neill. “What we now have is a whole complex interplay where Europe could cause significant damage beyond its own borders.”

Bloomberg News


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