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Leaders Turn Up Volume on Credit Crunch Ahead of G7

Governments must act together to protect the global economy and prevent another credit crisis from infecting markets, top financial officials said on Monday, ahead of key talks between economic powers this week.

Alistar Darling
Alistar Darling

"The G7 should lead the international response to these events," said British finance minister Alistair Darling in a letter to Group of Seven members obtained by Reuters ahead of their meeting in Washington on Friday.

His remarks were the latest from a European leader urging a coordinated response to the crisis. But there have been no firm proposals, least of all from the G7's U.S. hosts, and some officials are openly skeptical whether coordinated international action is needed.

The G7, which comprises the United States, Britain, France, Germany, Italy, Canada and Japan, has been urged by some quarters to tackle financial market turmoil caused by the collapse of the U.S. subprime mortgage market. This has inflicted massive losses on investors and dented world growth.

"I look forward to discussing with you the actions that we need to take, both to ease ongoing strains in global financial markets and to strengthen the resilience of the financial system for the future," said Darling. "It is essential that we have a clear plan of action ... We should also
consider the full range of policy options to ease current market conditions," he added.

This sentiment echoed an assurance from French Economy Minister Christine Lagarde that she expects European nations to close ranks over the need for action at the G7.

"Clearly a focused approach, coordinated views, a comprehensive approach would be much in order. I think we will have, us Europeans, a concerted and coordinated approach," Lagarde said during a trip to Brussels.

International Monetary Fund Managing Director Dominique Strauss-Kahn also issued a broad call to arms. "The need for public intervention is becoming more evident," he said in an interview with the Financial Times newspaper. "The crisis is global."

Central banks have poured extra cash into the financial system and the U.S. Federal Reserve has slashed interest rates, but analysts argue while such moves might soothe nerves in the short term, they cannot repair damaged trust in markets.

G7 Pressure

The current crisis was triggered by a raft of defaults on U.S. mortgages and then gained momentum as investors lost confidence in the value of exotic, secondary credit investment instruments and the banks that conjured them up.

The rates at which banks lend money to each other have in turn soared because of fears about what toxic debt may be lurking on balance sheets.

But policy-makers are wary of being seen to rescue investors and financial institutions from a mire of their own making.

Malcolm Knight, general manager at the Bank for International Settlements, said there was no clear need for the world's central banks to take joint action to purchase securities hit especially badly by the subprime crisis.

"This is an aspect of liquidity provision where I'm not sure I see a necessity of lock-step coordination among central banks," he was quoted as saying in The Wall Street Journal. "It depends on what's happening in each country's own markets."

Knight said banks must see that it is in their own interests to have consistent rules of engagement across territories.

If policy-makers appeared to bail out the very high levels of risk taking and leverage seen in the last five years, he said "they would be inadvertently building the underpinnings for another crisis five or 10 years hence."

Europe has already said it will press the G7 to demand more disclosure from banks on their investments as the credit crunch begins to be felt in households and businesses outside of the hard-hit financial sector.