England, which has been more candid in talking about the financial crisis than other countries (the governor of the Bank of England has said, for instance, that living standards will fall) issued a blunt assessment earlier today. The scary update is that even overnight lending is starting to break down.
From the Financial Times:
UK authorities insisted on Friday that action, not words, was needed from this weekend’s meeting of the group of seven leading economies if there was to be any hope of saving the world financial system from collapse.As financial markets stared at the abyss, the UK delegation to the meeting sought to raise the stakes in an effort to avoid a mere agreement on a set of broad principles.
Describing a world in which wholesale money markets were now refusing to lend to banks, even overnight, the UK authorities warned that the world was on the edge of a collapse of the financial system.
They insisted that a bold and clear commitment to action to should replace general principles for individual country actions.
Alistair Darling, chancellor of the exchequer, insisted that it was crucial that the G7 countries showed that they could act collectively.
”We need a clear commitment today. It is a real test of international institutions that we actually sign up to doing things rather than a piece of process,” Mr Darling said.
The UK does not believe that every country should follow its specific proposals, but they are insisting that all of them must announce measures to demonstrate that they agree on the provision of unlimited liquidity; a plan to strengthen financial institutions, including a huge recapitalisation of banks; and emergency measures for wholesale money markets, which Mr Darling said would ”enable banks to start lending to each other”.
There were indications on Friday that Germany was taking steps in this direction, after the Die Welt newspaper reported that Berlin was working on a UK-style rescue plan for its financial sector which could involve guarantees of more than €100bn ($137.2bn) and a large capital injection.
Reuters quoted a German finance ministry spokesman as saying that no decisions of this kind had been taken and that the government was observing the effectiveness of measures already taken.
However, the news agency also quoted a source from Germany’s ruling coalition who said said the report was not wrong.
Mr Darling declined to speculate on what would happen if the G7 did not deliver, but insisted that the only solution to the current crisis was bold government action on an internationally co-ordinated basis.
However, despite the urgent need for coordinated action, the G7 appears to be trying to tiptoe around the crisis rather than admitting to its severity. From Bloomberg:
Finance ministers and central bankers from the Group of Seven nations met for crisis talks in Washington amid an unprecedented public split over what to say in their joint statement.
The draft communique under consideration is “too weak” and fails to reflect the gravity of the financial turmoil, Italian Finance Minister Giulio Tremonti told reporters in Washington before the talks began. “We won’t sign it.”
While Britain has pushed for a coordinated agreement to guarantee loans between banks, one official from a G-7 member said it was unlikely the G-7 would endorse their proposal. Two European officials said earlier that the group was considering saying that no systemically important bank would be allowed to fail, and laying out principles for all nations to follow.
G-7 economic leaders “have never released a statement that they have not reached consensus on,” said Jenilee Guebert, senior researcher at the G-8 Research Group at the University of Toronto. “It would be unique. At this stage, however, for him to be saying this doesn’t necessarily mean it will transpire.”
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Heh … I commented this morning about Bretton Woods II dying before our eyes. Italy’s PM Berlusconi is on the same wavelength, according to Bloomberg:
Oct. 10 (Bloomberg) — Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world’s financial markets while they “rewrite the rules of international finance.” Berlusconi didn’t give any details about what kind of rules leaders were looking to change, except to say that leaders are “talking about a new Bretton Woods.”
How will Bretton Woods III differ from the busted Version II? Obviously, the US dollar can’t expect a unique status as the anointed reserve currency. Politically, the question will be how to spin the dollar’s demotion as a benefit. “More credit” will be the seductive promise.
An “emergency bill” to create a global central bank probably is already written. Now we just need a market crash and bank holiday to panic the Congressional sheep into passing it, unread.
All roads lead to inflation. Bretton Woods III will be as botched as the last one … just on a larger scale.
– Juan Falcone