World Leaders Offer Unity But No Steps To Ease Crisis

By Anthony Faiola and Neil Irwin
Washington Post Staff Writers
Sunday, October 12, 2008

Officials from 20 major countries yesterday endorsed a coordinated approach to the financial crisis, but they failed to announce any concrete steps, underscoring the difficulty of crafting a global plan to halt the contagion as it spread to the broader economy.

The announcement, made in Washington 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 that 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."

The financial crisis is now zapping consumer spending and dragging down the global economy. In the United States, the manufacturing sector has been particularly hard hit. In one of the most dramatic signs of the slowdown, General Motors, a touchstone of U.S. industry, is now considering a merger with Chrysler.

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 yesterday, 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 yesterday, President 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, he added, 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 an unusual step, Bush attended the G-20 meeting yesterday evening. He acknowledged that the epicenter of the crisis is in advanced countries and said the United States would make all possible efforts to overcome it, according to a White House statement.

In Europe, French President Nicolas Sarkozy held talks yesterday 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 yesterday, she suggested she was rethinking objections to the government taking an equity stake in banks, saying that Germany would announce a new plan at a European summit in Paris today.

She said the German 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.

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 when 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.

Yesterday, Guido Mantega, Brazil's finance minister and chairman of the G-20, said it was time for the organization to be rethought, calling it ill-suited to respond to a crisis. The group meets infrequently, mainly to talk about broad, long-term matters.

"The G-20 was not created to deal with this sort of situation," Mantega said. "Its makeup does not really allow it to act in a decisive fashion. There is no real structure to deal with an emerging economic problem. We have to turn the G-20 into a tool of some kind that can provide action better."

The International Monetary Fund, an institution long charged with global economic stability, has meanwhile been relegated to the sidelines. Although it played the leading role in emerging market crises in 1990s, which 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 developed countries have the means to deal with the problem, but we who are developing countries, or emerging countries, could collapse under the weight of such a crisis," said Adib Mayaleh, the governor of Syria's central bank said in Washington yesterday. "Our banking systems could come really crashing down."

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 yesterday released a list of 28 developing countries that had already been 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."

Staff writer Dan Eggen contributed to this report.

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