G7 Cuts Growth View, Shows Worry On U.S. Dollar Drop

Finance chiefs from rich nations offered a gloomier assessment of the global economy on Friday and vowed to act swiftly on wide-ranging reforms aimed at moving beyond a credit crisis that threatens world growth.

The finance ministers and central bankers also expressed concern about sharp fluctuations in currency markets since the Group of Seven last met in Tokyo in February, suggesting unease with how far markets have pushed down the U.S. dollar.

With fresh signs of economic distress in the United States, where a report showed consumer confidence hit its lowest level since 1982, the G7 officials said risks to the economic outlook were tilted to the downside. They pointed to the weak U.S. housing market, stressed financial markets and rising inflation as hurdles that still must be overcome.

"There may be more bumps in the road," U.S. Treasury Secretary Henry Paulson said after the officials concluded a meeting. "As we work through this period, our highest priority is limiting its impact on the real economy."

The G7 -- the United States, Canada, Britain, France, Germany, Italy and Japan -- stopped short of declaring that the U.S. economy was heading for a recession and steered clear of recommending the use of public funds to bail out troubled markets, an idea widely discussed before the meeting.

"We remain positive about the long-term resilience of our economies, but near-term global economic prospects have weakened," the G7 said in a communique. "The turmoil in global financial markets remains challenging and more protracted than we had anticipated."

WHAT NOW?

The main focus of the meetings was a special study commissioned by the G7 that offered a detailed assessment of the banking and regulatory failures that contributed to an eight-month-long and ongoing bout of market turmoil. The report offered dozens of recommendations on how to shore up banking oversight and regulatory cooperation to prevent a recurrence.

The G7 said it strongly endorsed the report from the Financial Stability Forum, which comprises central bankers and global regulators. The report calls for tougher capital requirements for banks to ensure they can withstand periods of financial market stress, and urges closer international cooperation between central banks and regulators.

Defaulting U.S. subprime mortgage loans sparked a tightening of credit that has mushroomed into an international crisis. Central banks have flooded markets with cash to try to spark lending, and the U.S. Federal Reserve and other central banks have cut interest rates to try to keep economies afloat.

Banks have already written down roughly $225 billion in assets tied to souring mortgages and other loans in 2007 and the first quarter of 2008, according to German Finance Minister Peer Steinbrueck, who dismissed as far-fetched estimates that losses could eventually reach $1 trillion.

"Numbers like that can cause a lot of fear, he said.

G7 members, notably the United States and Canada, want to push bankers to match the vigor that global central banks have shown in battling the liquidity squeeze by urging these private-sector players to quickly put losses behind them and raise new capital. A select group of bankers has been invited to a dinner on Friday night at the U.S. Treasury Department.

LIKE POETRY

In a nod to European leaders who had voiced dismay over volatile foreign exchange markets that pushed the euro to new highs against the U.S. dollar, the G7 also strengthened its call for calm in currency markets.

"Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability," the communique stated. "We continue to monitor exchange markets closely, and cooperate as appropriate."

That marked the first shift in four years from the G7's boilerplate language on currencies, and provided a verbal caution to markets that world finance leaders were keeping a close watch on currency moves.

"This change in the language ... shows a concern we have not seen for some years," Italian Economy Minister Tommaso Padoa-Schioppa said.

When asked about the thinking behind the changes in the statement, European Central Bank President Jean-Claude Trichet replied, "It's like a poem, it speaks for itself."

(Reporting by G7 reporting team; writing by Emily Kaiser and Glenn Somerville; editing by Tim Ahmann)

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