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Financial turmoil strikes as G-7 officials gather

2010-02-05 06:49:54

By MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger, Ap Economics

Writer 1 hr 55 mins ago

IQALUIT, Nuvavut A bout of turmoil in global markets has provided sobering

reminder to global financial leaders that the aftershocks from the worst

recession in seven decades are far from over.

Finance ministers and central bank presidents from the world's seven major

industrial countries the United States, Japan, Germany, France, Britain,

Italy and Canada were scheduled to arrive Friday for discussions in this

small snow-swept Canadian town about 200 miles south of the Arctic Circle.

The talks are expected to be dominated by the question of how much longer

extraordinary government stimulus should be provided to lift economic growth.

The risks still facing the global economy were highlighted dramatically after

bad economic news sent markets plunging around the world on Thursday.

The Dow Jones industrial average fell by 268 points or 2.6 percent, its biggest

one-day loss in seven months.

The slide had begun in Europe over concerns about high debt levels in Greece,

Portugal and Spain. Worries in those countries set off broader concerns that

government will have difficulty containing rising debts and borrowing more

money to help revive their economies.

On Friday, the global downturn extended to Asia, where markets from Tokyo to

Hong Kong to Sydney dropped 2.5 percent or more.

U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben

Bernanke were meeting with their counterparts from the other G-7 countries.

Geithner is expected to urge other G-7 nations to keep providing stimulus

through the rest of this year, arguing that without continued government

support the fledgling recoveries could falter, plunging the world back into

recession.

The talks, which will begin with a dinner Friday night, were scheduled to wrap

up with a closing joint news conference on Saturday afternoon.

The meeting was taking place in the most unusual G-7 setting ever: a tiny

outpost where temperatures can dip to 40 degrees below zero in February.

Canadian Finance Minister Jim Flaherty invited the other finance officials to

begin their Arctic stay with an afternoon of dogsledding.

Flaherty, the gathering's host, chose Iqaluit in part to drive home Canada's

claim to a region that may contain one-fifth of the world's petroleum reserves.

Some countries have expressed concern about how long stimulus aid should be

maintained. They worry about soaring budget deficits and the risk of inflation.

"We need to see a resumption of private-sector growth, but the key is that you

don't want to withdraw government support prematurely," a senior U.S Treasury

official told reporters. He spoke on condition of anonymity because he was

speaking before the finance officials' discussions.

Geithner will likely point to the mistakes nations made during the Great

Depression, when a tentative rebound fizzled after governments withdrew

emergency support too soon.

President Barack Obama set an example with a budget plan Monday that would

boost job-creation efforts and raise the U.S. budget deficit to a record $1.56

trillion this year.

Obama has pledged to make jobs his No. 1 priority in part to counter Republican

charges that he spent too much time during his first year in office

concentrating on health care reform.

British Prime Minister Gordon Brown, whose Labor Party is trailing in polls

ahead of likely June elections, is also stressing government stimulus.

Britain's budget deficit as a share of its gross domestic product could reach

12 percent this year.

In Japan, where the economy has struggled for two decades, the government

unveiled more stimulus spending last week. Other G-7 nations also have stimulus

measures still in place. But some politicians in Germany and France have raised

concerns about stoking inflation.

A year ago, the United States pressed Europeans to boost their stimulus

packages to match the $787 billion U.S. effort. Europeans resisted for fear of

escalating budget deficits. They instead enacted smaller stimulus packages.

Now, the focus is more on the duration of stimulus aid. Geithner is expected to

argue that government programs to support jobs must be kept in place through

this year to give business and consumer spending time to gather momentum.

But U.S. stimulus spending has raised fears that budget deficits could trigger

inflation and further drive down the dollar's value. A further fall in the

dollar would irk nations such as France and Germany. Their manufacturers have

complained that the dollar's slide against the euro gives U.S. competitors a

competitive edge. A weaker dollar makes U.S. goods cheaper in overseas markets

and European goods costlier for American consumers.

Another issue on the agenda is financial reform where G-7 officials are working

to develop a consensus on strengthening lax regulations that led to the

financial meltdown in 2008.

The efforts to narrow differences were dealt a setback after the Obama

administration last month surprised its G-7 allies by proposing tougher rules

on risky bank activities.

"The Europeans were very upset that Obama was going off in a different

direction than they had signed up for," said Nariman Behravesh, chief economist

at IHS Global Insight.

British officials have said they don't need the strict limits on risky trading

operations the administration is proposing. French Finance Minister Christine

Lagarde has also expressed concern while German Finance Minister Wolfgang

Schaeuble has stressed the need for global coordination on financial

regulation.