"A climate of much greater pessimism and worry" hung over the 9 February meeting of top finance officials from the United States, Japan, Germany, France, Britain, Italy and Canada, according the Italian Economy Minister Tommaso Padoa-Schioppa.
Although the seven nations promised coordinated action to counter the threat of "further deterioration of the US residential housing markets, tighter credit conditions from prolonged difficulties in the financial markets, high oil and commodity prices and heightened inflation expectations in some countries," no concrete measures were in fact put forward at the meeting in Tokyo and ministers said that each nation would decide on its own policies.
"Every country is different and every country has a different economic situation," said US Treasury Secretary Henry Paulson, who attempted to give assurances that the US economy would manage to avoid a recession. "I believe that we are going to keep growing. If you are growing, you are not in recession," he said. Nevertheless, the G7 statement acknowledged that risks to economic growth "have become more skewed to the downside" in the United States and ministers hinted that financial instability could worsen in the future.
"We should expect continued volatility as risk is repriced," conceded Paulson.
German Finance Minister Peer Steinbrück further warned that banking losses from exposure to US sub-prime mortgages could yet reach $400 billion – much more than the $120 billion announced by banks so far – making it even harder to keep short-term money markets functioning normally.
A report by the Financial Stability Forum (FSF) – a body created 10 years ago to deal with the aftermath of the Asian financial crisis – added to the gloomy forecast in predicting that the world would remain vulnerable to financial crises even if remedies are taken make financial institutions operate in a more transparent manner. "We must recognise the difficulty in foreseeing and preventing financial crises," it stated.
Despite the increased doom and gloom, European Central Bank President Jean-Claude Trichet insisted that the fundamentals of the European economy remain "sound" and that the interest rate cuts demanded by countries like France in order to prevent a slow-down of the economy remained unnecessary.
In the meantime, G7 nations renewed calls for China to accelerate the appreciation of its yuan, which they insist is undervalued and gives an unfair advantage to Chinese exporters.
The statement added that "exchange rates should reflect economic fundamentals", although, for the sake of showing a united front, no mention was made of the dollar's weakness, despite increasing concerns in Europe regarding the soaring euro. "It has reached a level we can consider is above equilibrium level," Economic and Monetary Affairs Commissioner Joaquín Almunia said.
The G7 ministers also urged oil-producing countries to boost their output in order to temper high crude prices. They added that the FSF is due to present, in April, a report on the underlying causes of the financial turmoil, containing remedial and preventive actions. “We will act expeditiously on its recommendations," they promised.
