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French Pres. Sarkozy Urges Vigilance on Markets

French President Nicolas Sarkozy has written to German Chancellor Angela Merkel, saying authorities must be "very vigilant" over financial market corrections, according to the letter released on Thursday.

Sarkozy said he did not expect current market volatility to affect the real economy but hoped for a discussion about markets with the Group of Seven (G7) countries, central banks and the International Monetary Fund in Washington in October.

He said heads of state and government should learn from the turmoil in markets but warned against excessive new measures that could slow economic growth.

"The market corrections that we are seeing are leading the appropriate authorities in each of our countries to be very vigilant about the development of the situation," he said in the letter, dated Aug. 15 and written from his lakeside holiday residence in the U.S. town of Wolfeboro.

Sarkozy, usually a vocal critic of the European Central Bank, praised monetary authorities for injecting liquidity into the markets in a timely manner to calm investors' nerves.

Equities markets worldwide have made losses in the past month as concerns over the U.S. subprime mortgage market and tightening credit conditions send investors running for cover.

European shares tumbled on Thursday to a five-month low, as worries over the credit market continued to weigh. Europe's benchmark index, the FTSEurofirst 300 has lost 10.6 percent since reaching a 6-1/2-year high on July 13.

Hidden Risks

Sarkozy said increasing securitisation of assets had helped economic development.

"But they have, at the same time, transferred bank risks onto a large number of economic players," he said. "Everyone realises that the final holder (of the risk) is very badly identified today and that this lack of knowledge, is in itself a cause of instability."

French bank BNP Paribas (BNPP.PA) shocked markets last week when it froze three funds that invested in U.S. subprime mortgages.

Risk aversion in financial markets is at its most intense since the Sept. 11 attacks, according to some measures.

European firms are still reporting healthy profits, however, and asset prices are mainly positive this year.

"I am convinced that these market movements will not have a lasting impact on the growth of our economies, which is robust," Sarkozy wrote.

Lessons to Learn

Sarkozy highlighted the importance of financial market transparency and said governments should draw conclusions from the volatility and look at regulatory solutions.

Proposals and analysis could be discussed at the Washington meeting in October, he said.

But Sarkozy said it was important not to overreact with steps that could harm economic growth.

"Naturally, the suggestions for change that I have outlined should not lead to the introduction of measures that would restrict the financing of our economies and hold back world growth," he wrote.

He also said it was important to ask questions about the role of ratings agencies in identifying risk.

"We have to ask ourselves about the exact role that ratings agencies have played regarding this category of risk," he said.

The European Commission will review a voluntary code used by credit rating agencies as they appeared too slow in warning about problems in the U.S. subprime mortgage sector, a senior Commission source said on Thursday.

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