G7 ready to act on global slowdown

Financial leaders from the world's richest nations showed signs on Friday they were ready to work together to tackle a global economic downturn and calm turbulent financial markets.

The credit crisis has sent stock markets tumbling worldwide, economies are weakening and central banks are cutting interest rates while currencies swing, creating a tense backdrop for Group of Seven finance ministers and central bankers meeting in Tokyo over the weekend.

A draft of their communique, obtained by Reuters ahead of its release on Saturday, said the G7 saw heightened economic risk and growth moderating in key economies.

The world economy is facing a "more challenging and uncertain environment" than when they last met in October, it said.

"We will continue to watch developments closely and remain committed to taking necessary action, individually and collectively, in order to secure stability and growth in our economies," the draft read.

This follows European Central Bank President Jean-Claude Trichet on Thursday softening his anti-inflation stance and stressing the high levels of uncertainty caused by financial market turmoil and risks to the euro-zone economy.

Markets read this as a sign that the ECB now is willing to follow fellow central bankers in cutting interest rates if needed to prevent a damaging downturn. The US Federal Reserve, Bank of England and Bank of Canada all have eased monetary policy.

HEALING DIVISIONS

Ahead of the G7 meeting, analysts worried the G7 club faced dangerous divisions over how to calm turbulent markets and ease fears of a worldwide slump from the credit crisis, with Europe and Japan unwilling to join in aggressive stimulus programmes.

Last month saw 1.25 percentage points in Fed rate cuts plus a $150 billion fiscal package to tackle credit problems from the sub-prime mortgage crisis. Whether this is enough to rescue the US economy and avert a worldwide economic slump remains very much in question.

US Treasury Secretary Hank Paulson sought to reassure on that front, saying the US economy is fundamentally healthy.

"I still believe that we are going to continue to grow, although at a slower pace for a while. But the risk is very much to the downside," he told Japan's NHK television.

The G7 financial leaders are not expected to break any new ground on foreign exchange rates at this meeting.

Rather, financial upheaval was in the forefront of ministers minds as they arrived for the Tokyo G7 meeting.

"We will hold frank discussions regarding the sub-prime impact on financial markets and the global economy," said Japanese Finance Minister Fukushi Nukaga.

CO-ORDINATION SOUGHT

German Finance Minister Peer Steinbrueck in a letter to G7 finance ministers called on his colleagues to address financial market problems.

"Prompt and co-ordinated action by central banks has helped to ease the immediate problems. Yet the full impact of the sub-prime crisis on the financial sector is yet to be known," he wrote in the letter seen by Reuters.

He said "political responses" were needed to strengthen risk management, bank capital and transparency in financial markets.

The Financial Stability Forum, a group of central bankers and other regulators studying the sub-prime mortgage problem and market upheaval, is due to deliver an interim report to the G7 policymakers.

But it was the willingness of central bankers to provide monetary easing that pleased politicians.

"I was pleasantly surprised on reading the declaration of Mr. Trichet," said French Economy Minister Christine Lagarde.

Russia's Finance Minister Alexei Kudrin said policymakers must work together to find solutions to the credit shortage.

"Co-ordination of efforts may soften the consequences of such crises, first of all a co-ordination of efforts between central banks on their refinancing rates because this is the key factor supporting the financial system," Kudrin told reporters in Moscow before heading to Tokyo.

British Finance Minister Alistair Darling played down the prospect of any co-ordinated steps to boost global growth at the G7. "The first thing is that conditions in different countries are not the same," he said.

Whether the emerging economies can come through the US shakeout relatively unscathed will be on the agenda when G7 officials meet with finance ministers of China, Indonesia, South Korea and Russia for dinner on Saturday.

The head of the Asian Development Bank, Haruhiko Kuroda, said on Friday fiscal stimulus could be an option for emerging Asian economies if global growth slows further but the main concern for now is to contain inflation. (Reuters)