Europe says all markets must be regulated

[Naveed Yaseen]

BERLIN (February 23 2009): Europe said on Sunday it was time to get tough with tax havens and strictly oversee all financial markets as part of sweeping reforms to avoid future meltdowns.

European Union leaders met in Berlin to forge a common approach to the global economic downturn that they can take to a meeting in April of the G20, a group of rich and big emerging economies charged with reforming the rules of world finance.

They backed a doubling of funds for the International Monetary Fund, which has spent billions of dollars in recent months shoring up economies in eastern Europe and elsewhere. They also agreed to bolster the supervisory role of the Financial Stability Forum, set up after the 1990s Asian financial crisis, and enlarge it to include emerging economies as well as rich nations.

In the United States, regulators will soon launch a series of "stress tests" to determine which US banks should get bigger capital cushions in case of a deeper recession, according to a source familiar with President Barack Obama's plans.

The largest US banks are well capitalised for current conditions, the source said, but the administration wants to ensure they can withstand a more severe economic climate and play a central role in helping restart the flow of credit.

The Berlin summit, hosted by German Chancellor Angela Merkel, also said that banks should introduce reforms to ensure they build up a buffer of resources in good times.

WORK TOGETHER:

"We're dealing with an extraordinary international crisis the likes of which we have not seen for decades, both as regards financial markets and the global economy," Merkel said.

"We believe that such an international crisis can only be solved jointly," she said, sitting alongside leaders from Britain, France, Italy and other EU states. A summary of their conclusions supported supervision of all financial markets and products in language slightly stronger than pledges made in Washington.

"This is especially true for those private pools of capital including hedge funds that may present systemic risk," it said. European nations will need to win the backing of Obama, as well as other big economies such as China and Russia, for their proposals to see the light of day at the G20 summit in London.

Since the G20 last met in Washington in November, deepening recessions in Europe and the United States have forced governments to push through huge stimulus plans that have raised fears of a return to protectionist policies seen in the 1930s. Some of France's EU partners object to its plans to offer 6 billion euros ($7.6 billion) in state loans to its carmakers.

DEFICIT:

After near daily announcements in the United States of cash injections to prop up its own auto sector and banks and stop more Americans losing their homes, Obama is already looking at where the US economy will be after any recovery.

He is expected to unveil a plan to cut the ballooning deficit in half by 2013 with a mix of tax increases on wealthier Americans and spending cuts. Private economists project the deficit will rise to $1.5 trillion this year.

"We can't generate sustained growth without getting our deficits under control," Obama, due to host a summit on Monday on fiscal responsibility, said in his weekly radio address on Saturday.

"On Thursday I'll release a budget that's sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't and restoring fiscal discipline."

Federal Reserve Chairman Ben Bernanke testifies before the US Congress from Tuesday and is set to offer assurances that the central bank, which has slashed interest rates to near zero and flooded markets with dollars, still has the ammunition to pull the economy out of its worst downturn since the 1980s.

CURRENCY SWAPS:

Up to 100,000 people marched through Dublin on Saturday to protest at cutbacks by the Irish government, including a pension levy on public sector workers and a pay freeze, brought in to try to stem a ballooning budget deficit.

In eastern Europe, the currencies of countries such as Poland, the Czech Republic and Hungary have come under severe pressure, hitting millions across the region who have borrowed in foreign currencies such as the euro.

Currency concerns were the focus of a meeting of finance officials from Asian countries, heavily dependent on exports, on the Thai island of Phuket on Sunday.

They agreed to expand a currency swap agreement to $120 billion from $80 billion to help bolster currencies that have been battered during the downturn.

The idea is to allow countries hit by short-term liquidity shortages to borrow foreign reserves from other countries to absorb selling pressure on their currencies. Stock markets plunged world-wide last week, amid concern that the slump is continuing to take its toll on banks, despite efforts by many governments to shore up financial systems.

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