Monday, October 15, 2007

The Upcoming G-7 Meeting and Related Fireworks

The upcoming G-7 meeting could be fairly interesting this time. When the dollar depreciates against the euro biting into European exports someone will have something to say. Also some European banks have taken some hefty losses in response to the US housing slump. This is also going to get someone’s attention. From Bloomberg:

A former Master of the Universe like Henry Paulson doesn't often find himself on the defensive. At international meetings this week in Washington, he will be.

Under pressure from European governments to abandon his hands-off approach to financial regulation and the depreciating dollar, the U.S. Treasury secretary and former Goldman Sachs Group Inc. chief executive officer may be forced to accede to the first while resisting the second.

European nations are leading the charge against him (Paulson). With the euro hitting a record high versus the U.S. currency, European exporters are being priced out of foreign markets.

``Sales of German exports are falling off drastically in the U.S.,'' says Anton Boerner, president of the Berlin-based BGA association of wholesalers and exporters. ``We've stepped beyond the pain threshold.''

France has been particularly vociferous in advocating action to stem the euro's rise, with Finance Minister Christine Lagarde, 51, even pushing the European Central Bank to sell the currency. She has also called on Paulson to say ``loud and clear'' that he still backs a strong dollar.

While Paulson has said repeatedly that a strong dollar is in America's interest, he says the value of currencies should be set by the market. Under President George W. Bush, the Treasury has never intervened in the currency market, either to buy or sell dollars.

``The most important thing for the U.S. is to maintain the stance on currencies that they've had,'' says John Taylor, Bush's former Treasury undersecretary for international affairs and now a professor at Stanford University in California. He says it's ``unlikely'' Paulson's rhetoric will change.

Paulson should be able to fend off pressure in part because the Europeans themselves aren't united on the issue. In spite of complaints from exporters, Germany has made clear it doesn't want to weaken the euro, with Finance Minister Peer Steinbrueck saying Oct. 9 that the currency's recent rise is ``nothing sensational.'' . . . .

. . . . What's more, the dollar's fall -- it's dropped more than 8 percent this year against a broad basket of currencies -- has helped boost U.S. exports and the economy at a time when the housing slump has slowed the expansion. Trade added 1.3 percentage points to growth in the second quarter, its biggest contribution since 1996. . . . .

. . . . ``Paulson seems to be moving a bit away from the view that there's nothing absolutely wrong with the markets, that the less regulation there is the better,'' says Edwin Truman, a former Federal Reserve and Treasury official who's now at the Peterson Institute for International Economics in Washington.

European policy makers have pinned much of the blame for the market turbulence on what they see as lax U.S. supervision of subprime-mortgage lenders.

If U.S. regulators ``had actually looked closely'' at whom financial institutions were lending to, ``some of these problems might have been avoided,'' U.K. Chancellor of the Exchequer Alistair Darling told BBC Radio Sept. 14.

In response to similar criticism from Congress, Fed Chairman Ben S. Bernanke agreed with state regulators to collaborate on supervision and enforcement of nonbank subprime lenders.

Europe is also pushing for increased supervision of U.S. ratings agencies, arguing that they have been too lenient in judging the creditworthiness of subprime loans and the securities they are packaged into. Among possible changes: separating the agencies' consulting businesses from their ratings services, so they wouldn't be advising the same companies whose securities they're grading.

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