World Leaders Discuss Regional Approaches

123jump.com Staff
10 Oct, 2008
New York City

The finance ministers gather in Washington to discuss current financial markets and banking system health and look for a global solution. The European political leaders are meeting in Paris this weekend to find their own solution but are likely to focus on banking system.

[R]4:30PM – New York – The world financial leaders gather to discuss current financial markets conditions and European leaders meet this weekend to find regional solution.[/R]

World markets plunge as investors’ confidence for risky assets decline around the world and interbank lending suffers from a near collapse of confidence.

The world leaders are searching for national, regional and global solution to the ever widening global banking crisis. But the meeting of finance ministers of wealthy nations today that does not include China, Russia and India may not have global reach that rich nations need. The meeting of G20 nations is expected in November that will include emerging markets.

European leaders of fifteen nations are planning to meet in Paris this Sunday evening along with the European Commission President Jose Barroso and ECB President Jean-Claude Trichet. The meeting G7 finance ministers in New York are scheduled to discuss world markets developments and find a solution to a growing global banking crisis.

European and American markets plunged despite assurances from the President Bush and Prime Minister Silvio Berlusconi.

The European Union leaders prefer to seek consensus on major decision and the current financial crisis has affected different nations in a different manner and to a different degree. Germany and UK are suffering from difficult interbank lending and Ireland and Spain have loans linked to regional construction industries. France reeling from its own exposure to the U.S. mortgage securities has less exposure than the UK and Germany linkages to the U.S.

The EU also lacks a common regulator and the recent meeting two weeks ago to bailout regional businesses of Fortis and Dexia SA failed to produce a common solution.

European Approach

The meeting between European leaders is likely to focus on how to save the failing banking systems and banks. The European approach is different from the one proposed by the U.S. Treasury in that it focuses on the interbank lending and banking system and not on financial assets of banks.

The ECB President is in favor of offering or purchasing short and mod-tem loans to banks or facilitating interbank lending market.

What is clear is that leveraged banks in Europe are looking for more capital to support the outflow of funds as depositors worry about the safety of their money. The European banks may need as much as $200 billion to strengthen their balance sheets and private investors are unwilling to step in.

UK Plan

The UK approach favors injecting capital directly in banks and supporting bank lending by strengthening their balance sheet. With banks leveraged at more than 10 to 1 ratio, every dollar injected in the bank supports more than ten times in capital base. But direct injection in the banks can also significantly dilute shareholders.

U.S. Focus Changes

U.S. Treasury Secretary Paulson appears to have changed his views on direct investing in failing institution. The latest thinking revolves around injecting more capital in banks and strengthening balance sheets and not focusing that much on buying up illiquid and potentially worthless securities.

Europe Markets Review

Despite the current talks among leaders, markets fell further and benchmark indexes closed lower in the region.

In London FTSE 100 Index closed lower 381.74 or 8.85% to 3,932.06, in Paris CAC 40 Index decreased 266.21 or 7.73% to close at 3,176.49 and in Frankfurt DAX index lower 342.69 or 7.01% to close at 4,544.31. In Zurich trading SMI decreased 451.62 or 7.79% to close at 5,347.22.