Sunday, October 26, 2008

Asia, Europe Leaders Urge More Finance Rules Before Bush Summit

French President Nicolas Sarkozy has started to try to put pressure on the U.S. in an effort to spur on the U.S. to embraces more regulatory supervision of the global financial markets. Asian and European leaders have agreed with Sarkozy and called for an overhaul of World War II-era banking rules.

The leaders "pledged to undertake effective and comprehensive reform of the international monetary and financial systems, according to a statement in Beijing on Friday. Chinese Premier Wen Jiabao told reporters after the gathering of more than 40 heads of state and government that "we need even more financial regulation to ensure financial safety."

U.S. and European leaders have sparred over the causes of the credit crunch and how to cure it. Sarkozy has called for stricter government oversight of banks and hedge funds. President George W. Bush, who will host the Group of 20 (G20) industrialized and developing nations on Nov. 15, emphasized the role of free markets in a speech yesterday.

"It is foolish to think that within a few weeks Europe and the U.S. are going to be able to overhaul international financial regulation," said Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh. "It will be extremely hard to come up with a consensus. I doubt the Europeans will even be able to agree among themselves." (Meltzer chaired a U.S. congressional commission that studied the international financial system in 2000 after the Asian financial crisis.)

The EU has floated the ideas of including more bank supervision, stricter regulation of hedge funds, new rules for credit-rating companies and changes at the International Monetary Fund (IMF). The French president has compared the effort to the 1944 Bretton Woods conference in New Hampshire that fixed exchange rates, hitched the world to the gold standard and created the IMF and World Bank.

"While the specific solutions pursued by every country may not be the same, agreeing on a common set of principles will be an essential step towards preventing similar crises in the future," Bush said Saturday in his weekly radio address. Nations must focus on "the fundamentals of long-term economic growth: free markets, free enterprise and free trade," Bush said.

The two-day summit in Beijing was the first meeting of Asian and EU chiefs since calls for coordinated action mounted along with bank failures and plunging stock prices that began last month.

"The IMF, World Bank and other agencies are falling behind the times," said Jeon Hyochan, a researcher at Samsung Economic Research Institute in Seoul. "The agencies need to strengthen their ability to take pre-emptive measures."

The Washington-based IMF is considering an emergency program to prevent a collapse of emerging markets by almost doubling borrowing limits for members and waiving its standard demands for economic austerity measures. The agency agreed on Friday to lend Iceland $2.1 billion in accordance with existing rules after the island nation's banking system collapsed, threatening a prolonged economic contraction.

"There is a unanimous consensus to push forward reform," said Kazuo Kodama, a spokesman at Japan's Ministry of Foreign Affairs. No agreement has been reached on the details of that reform, he said.

Japan wants the IMF to be able to act in a "nimble, speedy, timely manner" and "without excessively stringent conditions" when helping poorer nations, said Osamu Sakashita, a spokesman for Prime Minister Taro Aso.

The EU and Asian leaders were less specific in their statement, which says the "IMF should play a critical role in assisting countries seriously affected by the crisis."

Sarkozy's campaign for an overhaul threatens to expose differences with the U.S. over global financial governance. That may provoke tensions and bog down talks while individual countries continue to act on their own to limit the fallout.

Sarkozy said the mid-November meeting in Washington will involve regulatory decisions because EU and Asian leaders agree that action is needed.

"We have all understood it would not be possible to simply meet and have a conversation," Sarkozy said. "We needed to turn it into a decision-making forum."

The gathering to be hosted by Bush, who leaves office in January, will be the first of a series of financial summits that will also address foreign-exchange rates, according to Sarkozy, who said talks about currencies may be put off until after Nov. 15. "It is simply impossible to talk about the financial crisis without discussing currencies and the way in which they interact."

The pound and the euro have both lost more than 20% against the dollar in the past three months, and more than 30% against the yen. Aso said derivatives products that "flow around the world" should also feature on the agenda.

South Korea stressed the importance of trans-Atlantic unity in taking any actions. "If Europe and the U.S. become united, it would enhance whatever countermeasures are taken," South Korean President Lee Myung Bak said, according to his spokesman, Lee Dong Kwan.

The credit crisis is choking off funds to companies and people, undermining business and consumer sentiment. Stock markets and commodities have tumbled along with currencies this year.

Source: Bloomberg

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