The big economies that make up the Group of 20 said they will take whatever steps necessary to safeguard their banking systems, a surprise announcement meant to ease the high anxiety in global financial markets.
Finance ministers and central bankers also said after a dinner meeting in Washington Thursday that were “committed to a strong and co-ordinated international response to address renewed challenges facing the global economy, notably from heightened downside risks from sovereign stresses, financial system fragility, market turbulence, weak economic growth and unacceptably high unemployment.”
The G20's assurances had little effect. Asian markets fell, the Stoxx Europe 600 Index was 1.6 per cent lower this morning, and futures trading suggested North American stocks were set to resume their descent. Oil and copper declined.
In North America, the Dow Jones industrial average was down 61.04 points, or 0.57 per cent, at 10,672.79. The Standard & Poor’s 500 Index was down 5.81 points, or 0.51 per cent, at 1,123.75. The Nasdaq Composite Index was down 10.71 points, or 0.44 per cent, at 2,444.96.
In Toronto, the S&P/TSX composite index fell 158 points or 1.4 per cent, to 11,404.
"The market doesn't care any more about empty statements when such a stark reality is in front of everyone's eyes," said Jimmy Jean, an economist at Desjardins Capital Markets in Toronto.
G20 officials had signalled they would have little, if anything, to say after their meeting, held on the eve of the annual meetings of the International Monetary Fund and World Bank.
But that was before a global cascade in equity and commodity prices that began Wednesday afternoon in North America and showed little sign of relenting as Asian markets resumed trading on Friday morning. The Dow Jones Industrial Average suffered its biggest two-day decline since 2008, oil and gold prices tumbled and Canada’s currency fell to its lowest in almost a year against the U.S. dollar.
Asian markets pared losses after the G20 statement was released at around 10.30 p.m. ET in Washington. The G20 includes the big, established economies, including the United States and Germany, and the main emerging market powers, such as China and Brazil. Canadian Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney both attended the dinner.
Mr. Flaherty told reporters Friday that European officials are moving closer to an overhaul of their bailout program of the kind that Cananda and others have been pushing, but they aren't "quite there yet."
Calling the issues facing Greece a "grave challenge," Mr. Flaherty said that the Europeans need a rescue fund that will "overwhelm the problem." Added Mr. Flahety: "There was some progress last night."
Within the G20 statement, European members promised that the euro zone will have implemented “the necessary actions to increase the flexibility” of its €440-billion financial rescue by the name ministers and central bankers meet again next month. The statement said the goal is to “maximize” the impact of the European Financial Stability Facility in order to address contagion.
This is important because many investors are skeptical that European authorities have given themselves enough financial firepower to deal with a situation that has become increasingly dire. Worries about Greece’s insolvency have spread to several other countries, including Italy, the euro zone’s third biggest economy. These fears have put strains on European banks, which own considerable amounts of debt issued by these countries.
Over the past couple of weeks, non-European officials, including U.S. Treasury Secretary Timothy Geithner and Mr. Carney, have pressed their European counterparts to become more creative with their rescue fund. Mr. Geithner and Mr. Carney have pushed using the EFSF’s funds to back lending by the European Central Bank, which would multiple the scope of the bailout program.
“We commit to take all necessary actions to preserve the stability of the banking systems and financial markets as required,” the statement said. “We will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks.”
Three years ago, before the G20 became the main body for global economy policy, the Group of Seven nations attempted to give a jolt to confidence in the aftermath of the collapse of Lehman Brothers Holdings Inc. by ripping up its standard communiqué and issuing a fresh, concise statement that promised all necessary action to support financial markets and the economy.
The surprise in Thursday’s statement was the release of the document; there actually was little in the text that investors haven’t already heard.
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