Finance news

European finance ministers said the credit crisis will plague their economies through 2009 and pressed for greater disclosure by the region's banks and a coordinated response from governments around the world.

With the cost of borrowing euros reaching the highest since December last week, finance chiefs and central bankers concluded two days of talks in Brdo, Slovenia, on April 5 by saying the credit squeeze increasingly threatens to undermine European growth.

They agreed to tighten oversight of banks and urged them to be more open about the losses they face from the meltdown in the U.S. subprime-mortgage market. The ministers will this week call on the Group of Seven industrial nations to cooperate more in finding solutions, according to a confidential report obtained by Bloomberg News.

“Forecast after forecast, the outlook gets less favorable and we have to accept this fact,'' Italian Finance Minister Tommaso Padoa-Schioppa said in an interview with Bloomberg Television in Brdo. “The general sentiment is that the turmoil is not over, that there is still possible bad news in the pipeline.''

The fallout from record defaults on mortgages to U.S. households with a poor credit history has so far caused about $232 billion in losses and writedowns among the world's biggest financial companies, data compiled by Bloomberg show. The impact has spread to Europe with at least 34 of its institutions losing or writing down more than $77 billion.

Such Pain

Such pain has led banks to stop lending to all but the safest borrowers, forcing the euro interbank offered rate, or Euribor, to rise to 4.74 percent last week. European Central Bank President Jean-Claude Trichet told reporters in Brdo that the world's top central bankers are mulling fresh ways of boosting liquidity as they prepare to meet in Washington on April 11 for the G-7 meeting.

“We continue to see on the money market a level of tension,'' Trichet said.

The threat of tighter credit is “starting to materialize in the real economy,'' Slovenian Finance Minister Andrej Bajuk said after leading the talks. “It is expected in 2008 and 2009 there will be some slowdown in the European economy.''

European Expansion

The International Monetary Fund will this week cut its forecast for European expansion this year to 1.3 percent from 1.6 percent and predict a slowdown to 1.1 percent next year, according to the European document, which was discussed by the ministers in Brdo. European Monetary Affairs Commissioner Joaquin Almunia called the IMF's prediction “pessimistic.''

With the IMF forecasting global growth of 3.7 percent this year and next, the weakest since 2002, the European delegation to the G-7 will press their counterparts for greater coordination in battling the credit squeeze cashadvance.

“It is important to coordinate global responses, not least within the G-7, to the challenges the world economy is facing in terms of financial-market turbulence,'' according to the confidential report. “Authorities must remain vigilant to further policy responses that may be needed, in particular aimed at stemming mechanisms with a potential to amplify the effects of the turmoil.''

Banks should disclose their exposure to distressed assets and improve their management of risk, the document said. It warned that “it cannot be excluded that banks operating globally will face further deterioration in the credit quality of their assets, perhaps even extending to corporate loans.''

Banking Regulation

Amid concern that Europe's patchwork of banking regulation means a coordinated response would be difficult in a continental crisis, the ministers also agreed to create links among the supervisors of multinational financial companies and set guidelines for responding to market disruptions.

“We do not have satisfactory arrangements in place to deal with such a situation,'' Financial Services Commissioner Charlie McCreevy, in charge of drafting EU banking rules, told Bloomberg Television.

European officials played down concerns about the euro's 17 percent jump against the dollar in the past year and indicated they wouldn't push for the G-7 to criticize it. ECB Vice President Lucas Papademos told reporters in Brdo the G-7 message on currencies “would be the same'' as at the February meeting.

Trichet called excessive volatility “counterproductive for global growth'' and said recent trading was a “concern.''

Central bankers attending the Brdo talks signaled that the highest European inflation rate in almost 16 years remains a barrier to lowering interest rates. The ECB's Governing Council meets on April 10 and all 58 economists surveyed by Bloomberg News forecast it will leave the benchmark rate at 4 percent.

“We see some of the base effects coming down toward the end of the year, but we will still be at levels we don't feel comfortable with,'' ECB council member Yves Mersch said in Brdo. John Hurley, his colleague on the council, said “there are upside risks to price stability.''

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