G7 announces plan to restore confidence to financial system

The G7 group of leading industrialised nations set out a 100-day plan to shore up confidence in the financial system and promised a further string of reforms for implementation before the end of the year to try to avert a repeat of the current credit crisis.

Responding to a period of financial stress that the G7 finance ministers admitted yesterday was "more protracted than we had anticipated", the group demanded banks reveal more about their losses on mortgage-related derivatives and other credit markets assets, and submit to greater "stress testing" of the financial risks they are taking.

Finance ministers from the US, Canada, the UK, France, Germany, Italy and Japan gathered in Washington before this weekend's meeting of the International Monetary Fund. In a communiqué released last night, they called for new accounting standards for complex derivatives to be in place within 100 days, for new requirements for banks to increase their reserves to be in place by the end of July, and then for an overhaul of the international regulation of the financial system by the end of 2008.

The ministers endorsed the recommendations of a report this week from the Financial Stability Forum of central bankers, which called for new regulations on credit agencies and credit markets in response to the turmoil in financial markets since last summer.

The ministers also signalled their concern about the declining dollar, which has hit new lows against the euro, the yen and the Chinese yuan, among other currencies. "Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability," the communiqué states. "We continue to monitor exchange markets closely, and co-operate as appropriate. We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate."

Yesterday's meeting had foc-used heavily on the deterioration in the US, but ministers shied away from alarmist language and did not describe the US as being in recession. Nonetheless, the ministers signalled their growing concern that weakness in the US economy and in global markets could cause wider problems. "We remain positive about the long-term resilience of our economies, but near-term global economic prospects have weakened," they said. "While economic conditions differ in our countries, downside risks persist in view of the ongoing weakness in US residential housing markets, stressed global financial market conditions, the international impact of high oil and commodity prices, and consequent inflation pressures. The performance of emerging markets has been a bright spot, but these countries are not immune from global forces."