24 September 2008

U.S. Partners May Act Individually on Global Financial Woes

While countries cooperate, bailouts unlikely to be concerted, global effort

Japanese businessmen look at a stock indicator in Tokyo.

By Andrzej Zwaniecki
Staff Writer

Washington — Some foreign countries will try to shore up their financial systems but are not expected to emulate the U.S. financial rescue plan and make their efforts a coordinated global action, according to experts.

U.S. Treasury Secretary Henry Paulson and the chairman of the Federal Reserve, the U.S. central bank, Ben Bernanke, put together the $700 billion plan, which calls for the government to buy mortgage-backed and other securities that no one else wants to buy.

Paulson and other U.S. officials have been trying to persuade governments of developed countries to help the American effort to clean up the balance sheets of banks with bad loans.

“We have a global financial system, and we are talking very aggressively with other countries around the world and encouraging them to do similar things,” Paulson said.

U.S. officials argue the crisis — caused by the weakness in the U.S. mortgage market — affects the global financial system because of interconnections among countries’ financial markets. They suggest that action on a global scale will more fully solve the problem.

The United Kingdom’s prime minister, Gordon Brown, expressed a similar belief when he said the global nature of the recent turmoil requires an international response. But Alistair Darling, the British chancellor of Exchequer, told the governing Labor Party’s conference that the United Kingdom will not create a government fund to buy bad assets.

And some other U.S. economic partners from the Group of Seven (G7) are not convinced that they need to bail out firms holding bad debt, the way the U.S. administration proposes, said John Kirton, director of the Group of Eight (G8) research group at the University of Toronto.

For example, Japanese central bank governor Masaaki Shirakawa said he did not believe the stability of the Japanese financial system was at risk.

Other countries believe that the problem should be solved by the United States because most of the distressed debt is held by American banks, Kirton told America.gov. Some German and U.K. banks have had significant holdings of bad U.S. assets, but Asian banks have not invested as much in such assets. An August study by the Federal Reserve estimates that losses of foreign nationals holding U.S. mortgage-backed securities are unlikely to exceed $75 billion.

Ken Rogoff, an economist at Harvard University and former chief economist of the International Monetary Fund, said that countries such as the United Kingdom, Ireland and Spain probably will act in the next few months to address their financial woes, which weigh on their economic growth in a way similar to the way toxic securities weigh on the U.S. system.

“It is hard to imagine that the United States will be alone in this,” he told America.gov.  But other countries will take action in their self-interest, not under pressure from Washington, he said.

In a statement issued at the conclusion of a September 22 teleconference, G7 finance ministers vowed to “enhance international cooperation.” They also expressed support for “whatever actions may be necessary” taken by individual countries.

Kirton said U.S. partners have proven their willingness to cooperate. The Federal Reserve worked together with central banks in Australia, Canada, Europe, Japan and Switzerland to provide access to funds to their respective domestic lenders or prevent the crisis from spreading to the international currency markets. Regulators in the United Kingdom and Australia have joined their American counterparts in temporarily banning a stock-trading practice they believe increased market turmoil.

WILL THEY DO MORE?

Kirton said it is not entirely clear what the U.S. administration expects from other countries. If Washington counts on foreign money to help it finance its plan, as some news reports suggest, foreign funds will not be coming, he said.

Rogoff considers the U.S. plea for help reasonable, particularly since the administration included in its proposed legislation a plan to buy bad assets from foreign banks with significant U.S. operations.

“But I don’t think financial help is in the cards,” he said. “There just isn’t enough agreement among G7 countries about the plan’s necessity or effectiveness.”

However, George Friedman, chief executive of Stratfor.com, an intelligence analysis firm, said solving the U.S. financial crisis is critically important to the entire global economy, including large emerging markets.

“We will need not only Chinese, but Saudi and to some extent Russian money to fund some of this," he told the National Public Radio network. “It is in the national interest of all these countries to see the American markets come through it.”

But sovereign wealth funds in emerging markets that earlier invested in faltering U.S. financial companies have shown little interest in even more distressed U.S. financial assets.

Kirton said it is extremely difficult for foreign leaders to ask their taxpayers and legislators to send money to America when the U.S. administration is struggling to convince its own legislators about the merits of the largest government intervention in private markets since the Great Depression. Governments of several key countries also are constrained by economic and political realities, he added. Some, like Japan, have large budget deficits; others are constrained by fragile political coalitions or face elections.

“At the minimum, G7 partners would want to see the details of the [U.S. rescue] plan,” Kirton said, a plan that is likely to emerge from Congress with some differences from what the administration has proposed.

The full text of the G7 finance ministers’ statement is available on the Treasury Department Web site.