G-20 Pledges to Support Economic Relief Efforts

Group of 20 finance chiefs have pledged to take action in combating the global economic slowdown and tackling Europe’s sovereign debt crisis. In a statement released late yesterday in Washington, G-20 finance ministers and central bank governors said they were “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.”

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Though the statement stopped short of outlining any new policies to stimulate growth, the unexpected announcement alerted investors to that fact that authorities were actively involved in finding a solution to the economic turmoil that has been engulfing the globe. But “verbal support without any concrete action is no longer convincing,” said Joe Lau, an economist at Société Générale SA in Hong Kong. “Investors are now looking for viable credible actions from policy makers and, given the amount of nervousness and uncertainty out there, that may not even be enough.”

However, euro leaders did vow to increase the flexibility of the European Financial Stability Facility in the G-20 statement, saying they planned to “maximize its impact” by the time the group next meets on October 14. Citing “financial system fragility” and “heightened downside risk from sovereign stresses” among the biggest threats to growth, G-20 officials said they would ensure banks are adequately capitalized and have access to liquidity.

Yesterday, U.K. Prime Minister David Cameron and five other G-20 leaders wrote to French President Nicolas Sarkozy, the current G-20 chairman, demanding that European governments “act swiftly to resolve the euro crisis” and consider “all possible options to ensure long-term stability in the world’s second-largest international currency.” Meanwhile, officials from China and Japan, the world’s second- and third-largest economies, said that while they can buy EFSF bonds if needed, there is no “blank check” and the euro zone needs to solve the debt crisis itself.

“At the margin we can do quite a bit to help,” said Chinese central bank Deputy Governor Yi Gang in an IMF panel. At the same time, “the real solution of the European sovereign debt crisis has to be done by Europeans themselves.” But finance officials from Brazil, Russia, India, China, and South Africa — a group referred to as BRICS — said in a statement that they are “open to consider, if necessary, providing support through the IMF or other international financial institutions in order to address the present challenges to financial stability.”

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The European Central Bank has also indicated that it may take action as soon as next month. An interest-rate cut and the extension of long-term loans to banks are both possibilities. In the meantime, European parliaments are focusing on expanding the 440 billion-euro European Financial Stability Facility so that it can continue to buy the debt of countries like Greece, Spain, and Italy, as well as aid troubled banks and offer credit lines. However, only six nations have ratified the measure so far.