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Global Financial Crisis Tests World Economic Powers

  • Anna Zalewski

The recent turmoil in the U.S. housing market and its impact on the nation’s financial system has had a ripple effect on the global banking system and the world economy. An old adage says, “When America sneezes, the World gets a cold.” Except this time, it seems, the United States and the whole world have contracted a full-blown pneumonia. When the Wall Street markets first reacted to the financial crisis about a month ago, many around the world considered it “America’s problem”. But those who are wiser knew that in this era of electronic trading and inter-dependent financial systems, what was happening in the United States was bound to be felt globally.

And so it was. After the U.S. government stepped in to seize control of the world’s largest insurance company – AIG -- Britain, Germany, France and other European countries announced multibillion-dollar plans to guarantee their banks. Russia shut its stock exchange for two days. Iceland almost went bankrupt. And this week we learned Pakistan was begging the International Monetary Fund to help shore up its economy. Overall – governments around the world have already promised about $3.3 trillion to guarantee bank deposits and bank-to-bank lending.

Initially, as Matthias Reub of the Frankfurter Allgemeine Zeitung explains, there was a feeling of ‘Schadenfreude’ in Europe: “ When the whole thing started approximately four weeks ago, there was the official and public reaction that this is an American problem. And the German Secretary of the Treasury Mister Steinbrück said literally ‘This has nothing to do with us, we will not be affected’. And he also said “ This is the end of the financial superpower of the United States

As it turned out, Europe as well as most of the industrial world has been affected. After convening four times, and trying to come up with a unified response, the EU leaders decided a nation-by nation approach would work best since banking supervision remains under national control.

Soon the idea of injecting large sums of money into major banks had been exported across the Atlantic to the United States. Some went even as far as saying that the world’s financial leadership is shifted from the United States to Europe. But as Pierre-Yves Dugua, Washington business correspondent for Le Figaro, points out this prediction would have been premature.

“There are some obvious reasons for that," he said. "There is no single European currency. There are two major financial centers in Europe – one is London, the other one is Switzerland and they are not a part of the euro; there is no European treasury secretary; there is no executive financial body within the European Union, let alone in Europe to decide how to tackle these issues. There is no single banking authority in Europe.”

On the other hand, some may argue that the British Prime Minister Gordon Brown has emerged as this very kind of authority. Richard Wolffe of Newsweek, a U.S.-British journalist says Mr. Brown’s background has served him well in this crisis.

“As the finance minister he [Gordon Brown] was an expert in number of different things, especially on things in Washington like the International Monetary Fund, the EU economy, and what we’re seeing now is Brown really leading a way on a number of different things: First of all the rescue of big banks and the idea of putting government money directly into these banks in exchange of some kind of shared ownership as a way to ease up the crisis on banks and ease up credit, the lending especially between the banks," he said. "So his policy proposals has become standard in Europe, and much more recently also for the Bush administration in America.”

Another European leader who has been very active and very much involved in addressing the current crisis is French President Nicolas Sarkozy. According to Pierre-Yves Dugua of Le Figaro, a “take-charge” approach to any problem is in Mr. Sarkozy’s nature.

“I think it reflects the character of the French president who once he decides to tackle a problem will get very passionate about it and will insist on having as many measures as possible being undertaken as rapidly as possible,” he said.

After a number of meetings in Brussels, Strasbourg and Paris, President Sarkozy met with President Bush only last Saturday. As a result both leaders announced plans to organize a global summit to overhaul the regulatory framework for global finances soon after the U.S. elections.

Pierre-Yves Dugua says that besides improving oversight of big banks and hedge funds or getting rid of world’s tax havens the agenda of such a summit should address a wide range of issues.

“New ways to measure risk-taking by banks, new ways to measure how effectively banks allocate their capital, and measures to make sure that banks’ balance sheet actually reflect the risks that the banks are taking," he said. "One big issue that investors have with banks, one big element of this crisis of confidence is that the investors do not know today what is the actual risk they’re taking if they put their money either as a deposit or in an equity of a major bank So they have to go back to all these agreements which usually are decided in the Swiss city of Basil and go back to a drawing board and make sure that banks allocate their capital and measure their risk properly.”

To discuss what can be done about the current crisis and ways to prevent future crisis a summit has been called for November 15. The summit will include major industrialized nations and key emerging-market countries like China, India, Russia, and Brazil. As the British Prime Minister Gordon Brown noted: We are all in this together.

This edition of International Press Club was written by Anna Zalewski and voiced by Terry Wing.

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