(Guardian) - The recent turbulence that has rocked Wall Street and financial markets around the world will be the No. 1 topic when officials from the richest countries gather later this week.
A global credit crisis took a turn for the worse in August, sending stocks around the world into a tailspin. Things have calmed down since, but the financial situation remains fragile. Federal Reserve Chairman Ben Bernanke , in a speech earlier this week, predicted it would take some time for the markets to fully stabilize.
``Clearly, recent financial market turmoil will be a focal point and a good part of the G-7 meeting will be devoted to this issue,'' David McCormick, the Treasury Department's under secretary for international affairs, said Wednesday. His remarks were part of a briefing about the Group of Seven's meeting on Friday.
That group is made up of the United States, Japan, Germany, France, Britain, Italy and Canada.
A meltdown in the U.S. mortgage market started with problems involving `` subprime '' mortgages made to people with spotty credit or low incomes. Foreclosures hit record highs and late payments spiked. Lenders were forced out of business. As the problems spread to more creditworthy borrowers, hedge funds, banks and other investors in mortgage-backed securities took a huge financial hit. The troubles in the United States affected investors overseas as well.
``The issues raised by the recent turmoil are complex and require careful analysis,'' McCormick said. ``We must undertake this work quickly, but we cannot rush to judgment.''
Treasury Secretary Henry Paulson has asked the Financial Stability Forum - under the leadership of Bank of Italy Governor Mario Draghi - to form a working group to look at the underlying causes of the turbulence, McCormick said.
He added that the group will be asked to offer proposals in the areas, including risk management, accounting and valuation of sophisticated financial instruments called derivatives and the role of credit rating agencies in the debacle.
Draghi will talk to finance ministers about this work. A final report, however, isn't expected to be delivered until April 2008, McCormick said.
Even as finance officials plan to look deeper into the recent financial turmoil, McCormick stressed that the globalization of financial markets has brought many benefits to the world, including broader choices in financial products and expanded opportunity.
McCormick echoed Bernanke's comment that a full market recovery will take time.
``There are signs that financial market conditions have begun to stabilize in some areas, although we recognize that it will take some time to work through the recent difficulties,'' McCormick said.
So far, the global economy appears to be weathering the financial storm.
The International Monetary Fund, in a report issued Wednesday, projected that the global economy would grow by 5.2 percent this year and moderate to 4.8 percent in 2008. That's slower than last year's brisk 5.4 percent growth but still considered healthy.
The IMF lowered its forecast for U.S. growth, predicting the economy would expand by just 1.9 percent this year and next, reflecting the impact of the worst housing slump in 16 years and the effects of the credit crisis. If the IMF's forecast for this year proves correct, it would be the weakest growth the U.S. has logged in five years.
McCormick said it was expected that the housing and credit troubles would result in a ``penalty'' to U.S. economic growth.
On other issues, McCormick said Paulson will raise the issue of a clean technology fund, which President Bush mentioned several weeks ago, when he meets with his financial counterparts. Such a fund would help finance clean energy projects in the developing world by ``focusing on financing the gap between traditional and more expensive clean technology,'' McCormick explained. As envisioned, the fund would be backed financially by a broad range of donors. Details, however, have to be worked out, he said.
At the G7 dinner on Friday evening, finance officials will discuss ``sovereign wealth funds,'' which are government-controlled investment funds that have grown significantly in size and are playing an increasingly larger role in the global economy. Officials from China, South Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore and the United Arab Emirates have been invited to take part in the dinner discussion.
McCormick sidestepped questions about whether G7 officials would say anything specific about the falling value of the dollar. The decline in the dollar, relative to the euro, has given some Europeans heartburn. It has made European goods more expensive in the United States, while U.S.-made goods have become less expensive in Europe.