Monday, August 8, 2011

G-7 seeks to avert market collapse

Group of Seven nations sought to head off a collapse in global investor confidence after the U.S. sovereign-rating downgrade and a sell-off in Italian and Spanish debt intensified threats to the world economic recovery.

The G-7 will take "all necessary measures to support financial stability and growth," the nations' finance ministers and central bankers said in a statement today. Members will inject liquidity and act against disorderly currency moves as needed, they said.

The European Central Bank indicated separately that it will buy Italian and Spanish bonds, and Japan signaled further dollar purchases in a sign of concern that prices are becoming unhooked from fundamentals.

"It is unclear whether the promise of coordinated efforts to provide liquidity will be enough to avert a panic," said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. She said the G-7 "gave a raspberry" to Standard & Poor's for the U.S. rating cut last week and "basically said its analysis is irrelevant."

Many market analysts expect stocks to fall sharply today because of anxiety about the downgrade of the U.S. credit rating, the debt crisis in Europe and last week's stock-market plunge.

Mark Zandi, chief economist at Moody's Analytics, said he expected the downgrade to cause a sell-off today.

"There's a lot of fear and misunderstanding and confusion, and that all could come out in the stock and bond markets. I don't think it takes much to unnerve investors given the current environment. I think anything could drive investors to sell given how fragile sentiment is," he said.

Former Federal Reserve Chairman Alan Greenspan, who appeared on NBC's "Meet the Press" Sunday, expects the selling to last for some time. "It is very unlikely that (this) isn't going to take a while to bottom out," he said.

"It depends on Europe, not the United States," Greenspan said. "The United States was actually doing relatively well, sluggish but going forward, until Italy ran into trouble." He said that half of U.S. corporations operate in Europe, and that the region "has been a very important driving force in the overall earnings of U.S. corporations."

While the G-7 statement was "better than nothing," it's not likely to stem the dollar's decline, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. He added that the scope for coordinated policy action is limited by inflation pressures, caps on spending, and interest rates already near zero in nations such as the U.S. and Japan.

Avoiding another recession may be "mission impossible," Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC, wrote in the Financial Times.

A day before the U.S. credit rating slipped to AA+, the Dow Jones industrial average fell 513 points, its biggest drop since the 2008 financial meltdown. The plunge contributed to a nearly 10 percent slide in the Dow over the past two weeks. One reason for the drop is that Italy looks like it could be the next European country to need a bailout, raising concerns about the health of the global economy.

"No change in fundamentals warrants the recent financial tensions faced by Spain and Italy," said the G-7, made up of the U.S., Canada, U.K., Germany, France, Italy and Japan. Policy measures announced by Italy and Spain will "strengthen fiscal discipline and underpin the recovery in economic activity and job creation," the officials said.

Sovereign investors from Europe to Asia expressed confidence in U.S. government debt after the S&P decision.

Japan, the second-largest international investor in American government debt, after China, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity after the S&P decision.

In Asia, stocks fell today, but losses were contained amid the G-7's announcement. Japan's Nikkei 225 stock average was down 2.5 percent to 9,067.88, and Seoul's Kospi was off 6.7 percent to 1,814.100. Hong Kong's Hang Seng was tumbling 4 percent to 20,100.20. Australia's S&P/ASX 200 dropped 2.7 percent to 3,996.10.

Futures pointed to losses on Wall Street when it opens today. Dow futures were off 258 points, or 2.3 percent, at 11,144 and S&P 500 futures shed 28.8 points, or 2.4 percent, to 1,169.00

Russia considers U.S. debt reliable and won't review its policy of investing in the country, Deputy Finance Minister Sergei Storchak said after the downgrade. The cut "can be ignored" for a long-term investment strategy, he said. Russia, a Group of 20 member, is one of the 10 largest foreign holders of U.S. government debt.

G-20 officials also conferred Saturday after S&P's move, which the U.S. Treasury Department said was flawed by putting discretionary spending levels at $2 trillion higher than the Congressional Budget Office estimates. S&P responded that its judgment wasn't meaningfully affected by such spending figures.

by Toru Fujioka Bloomberg News Aug. 8, 2011 12:00 AM

G-7 seeks to avert market collapse

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