WASHINGTON – Officials from 20 major countries on Saturday endorsed a coordinated approach to the financial crisis, but they failed to announce concrete steps, underscoring the difficulty of crafting a global plan to halt the contagion as it spread to the broader economy.
The announcement, made by finance ministers from major developed countries as well as emerging giants such as China and Brazil, echoed a broad set of principles outlined Friday by the world’s richest nations. But critics have described such responses as too bland and vague to calm panicked investors following the record rout on stock markets last week.
Advocates for a coordinated global response say the scope of the financial crisis requires enormous resources and that a piecemeal approach by individual countries leaves the global system exposed to weaknesses. Lack of faith in any one country’s response could spark investor unease, and that unease could quickly spread across borders.
“You need specific, concrete steps, not a list of principles that are obvious and everyone can easily agree to,” said Simon Johnson, former chief economist at the International Monetary Fund and a senior fellow at the Washington-based Peterson Institute for International Economics. “It’s not what the markets are looking for before trading starts in Asia.”
Investors may have had unrealistic expectations of how quickly diplomats could act. The specifics of possible solutions to the crisis – such as how to expand insurance for depositors and guarantee lending between banks – are still being hotly debated in the diplomats’ home countries, many of which face unique economic challenges. Some have huge and troubled banking systems, while others have few ailing banks at all. Some are dealing with a collapsing real estate market, while others were never threatened by a housing bubble.
“Each of the G-7 nations knows what has to be done, what the government needs to do,” Shoichi Nakagawa, the Japanese finance minister, said in an interview Saturday, referring to the Group of Seven industrialized nations. “Each country understands what needs to be done.”
After meeting with financial ministers from the G-7 Saturday, Bush called on world governments to continue working together to stabilize collapsing financial markets.
“All of us recognize that this is a serious global crisis and therefore deserves a serious global response,” Bush said. Leaders had agreed to “take decisive action to support systemically important financial institutions and prevent their failure, provide robust protection for retail bank deposits and ensure financial institutions are able to raise needed capital.”
In Europe, French President Nicolas Sarkozy held talks Saturday with German Chancellor Angela Merkel. Merkel had previously resisted adopting a plan to partially nationalize banks, along the lines of a plan announced by Britain and another one taking shape in the United States. But Saturday, she suggested she was rethinking objections to the government taking an equity stake in banks, saying that Germany would announce a new plan today at a European summit in Paris.
She said the Germany plan would involve “providing banks with sufficient capital so that they are able to operate on their own – and I don’t rule out that there could be capital support.”
German resistance to major capital infusions in the banking system had been seen as a stumbling block to a coordinated approach in Europe. But even if that hurdle falls, it is unclear how major European powers would act to stabilize the banking system in smaller countries in the region, particularly in Switzerland, which is not a member of the European Union and where banking giant UBS may require more capital to stabilize it than the Swiss government can provide.
The challenge of developing a coordinated approach is made all the more difficult because diplomats lack a viable forum in which to hold talks, analysts say. Calls are rising to disband, or expand, the G-7, created at a time when the United States, Europe and Japan monopolized economic power and countries such as China were not as relevant economically as they are today. The broader group meeting this weekend, known as the Group of 20, also includes Brazil, Mexico and other emerging economies. But its authority and the scope of its mission are limited.
After its meeting Saturday night, the group issued a statement saying it was “committed to using all the economic and financial tools to assure the stability and well functioning of markets.” The group also “committed to ensuring that actions are closely communicated so that the action of one country does not come at the expense of others or the stability of the system as a whole.”
The International Monetary Fund, an institution long charged with global economic stability, has been relegated to the sidelines. Although the IMF played the leading role in emerging market crises in 1990s that spread through Latin America and Asia, the current worldwide crisis dwarfs the fund’s ability to manage it.
The IMF has instead been largely left to offer gentle advice to U.S. and European officials, while entering talks on possible assistance to deeply troubled Iceland and preparing to contain the crisis at the margins as it spreads to the developing world.
Fund action in the developing world may prove necessary, analysts say. Although China and Brazil, for instance, are flush with cash reserves and appear poised to withstand the crisis even better than the West, the banking systems in other parts of the developing world could prove more fragile.
The IMF has about $196.2 billion available to lend to its members in a relatively short period, an amount that analysts say should be enough to manage a string of problems in smaller nations.
The World Bank on Saturday released a list of 28 developing countries already hit hard by rising prices for food and fuel and are now highly vulnerable to the global financial crisis. Several are on the cusp of failing to cover their foreign debt or meeting budget needs, including Nepal, the Central African Republic and Eritrea.
“The impact on developing countries will be unavoidable,” said Justin Lin, chief economist for the World Bank. “We have the obligation to make some preparation; we need to be ready financially in order to help the poor people, the vulnerable people.”