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Noda: G-7 to Inject Liquidity as Needed

Group of Seven nations sought to head off a collapse in global investor confidence after the U.S. sovereign-rating downgrade and a sell-off in Italian and Spanish debt intensified threats to the world economic recovery.

The G-7 will take “all necessary measures to support financial stability and growth,” the nations’ finance ministers and central bankers said in a statement today. Members will inject liquidity and act against disorderly currency moves as needed, they said.

The European Central Bank indicated separately that it will buy Italian and Spanish bonds and Japan signaled further dollar purchases in a sign of concern that prices are becoming unhooked from fundamentals. Stocks extended last week’s decline, the biggest since 2008, adding to risks for a global rebound burdened by European fiscal cuts and elevated U.S. unemployment.

“It is unclear whether the promise of coordinated efforts to provide liquidity will be enough to avert a panic,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. She said the G-7 “gave a raspberry” to Standard & Poor’s for the U.S. rating cut last week and “basically said its analysis is irrelevant.”

The MSCI Asia Pacific Index slid 0.8 percent at 10:01 a.m. in Tokyo, adding to last week’s 7.8 percent decline. Standard & Poor’s 500 Index futures lost 1.7 percent, following a two-week rout that dragged the gauge down 11 percent and erased its 2011 gain. The dollar reached an all-time low of 74.85 Swiss centimes before trading at 76.20.
Treasuries Fall

Treasuries fell, sending 10-year yields two basis points higher at 2.57 percent after trading opened for the first time since the S&P announcement of the one-step cut in the U.S. sovereign rating to AA+. The rate slid to as low as 2.33 during Aug. 5, the least in 10 months, benefiting as a safe haven even as S&P prepared to lower the U.S. rating.

While the G-7 statement was “better than nothing,” it’s not likely to stem the dollar’s decline, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. Muto added that the scope for coordinated policy action is limited by inflation pressures, caps on spending, and interest rates already near zero in nations such as the U.S. and Japan.

Avoiding another “severe” recession may be “mission impossible,” Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC, wrote in the Financial Times.

Spain, Italy

“No change in fundamentals warrants the recent financial tensions faced by Spain and Italy,” said the G-7, made up of the U.S., Canada, U.K., Germany, France, Italy and Japan. Policy measures announced by Italy and Spain will “strengthen fiscal discipline and underpin the recovery in economic activity and job creation,” the officials said.

The statement added that “the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area.” The latest bailout package for Greece includes voluntary contributions from private-sector bondholders.

The MSCI World Index fell to the weakest level since November at the end of last week.
Emergency Call

The ECB said yesterday it will “actively implement” its bond-purchase program, in a statement issued in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, separate from the G-7 call.

The bank also called on all euro-area governments to follow through on the measures agreed in July, including allowing the European Financial Stability Facility to buy bonds on the secondary market.

“It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program,” the central bank said.

After a series of calls involving German Chancellor Angela Merkel, French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Rodriguez Zapatero and Italian Prime Minister Silvio Berlusconi, European leaders pledged to push implementation of last month’s deal on the European Financial Stability Facility. Berlusconi announced measures to speed austerity and target a balanced budget in 2013, a year ahead of schedule.
Italy’s Debt

Yields on Italy’s 10-year government debt have increased to 6.1 percent from 4.6 percent in two months, while Spain’s yields have increased to as high as 6.29 percent from 5.14 percent in March. Ten-year borrowing rates for both nations reached the most since before the euro was introduced in 1999.

“The ECB is now in for the long haul and will potentially have to buy up to half of the Italian and Spanish traded debt, the biggest risk-pulling effort ever engineered in Europe,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London.

Sovereign investors from Europe to Asia expressed confidence in U.S. government debt after the S&P decision.

Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity two days ago after the S&P decision.

Japan’s efforts to weaken the yen may boost its need to purchase Treasuries, after the nation’s authorities mounted the third round of yen sales since September last week. Vice Finance Minister Fumihiko Igarashi said over the weekend that the government is ready to intervene again.
Yen, Franc Gain

Currency investors poured into the yen and Swiss franc amid the global turmoil, as currencies of nations with current- account surpluses. The yen approached a postwar high against the dollar last week before Japan intervened.

Russia considers U.S. debt reliable and won’t review its policy of investing in the country, Deputy Finance Minister Sergei Storchak said after the U.S. downgrade. The cut “can be ignored” for long-term investment strategy, he said. Russia, a Group of 20 member, is one of the 10 largest foreign holders of U.S. government debt.

G-20 officials also conferred yesterday after S&P’s move, which the U.S. Treasury Department said was flawed by putting discretionary spending levels at $2 trillion higher than the Congressional Budget Office estimates. S&P responded that its judgment wasn’t meaningfully affected by such spending figures.
S&P Move

The S&P move went further than Moody’s Investors Service and Fitch Ratings, which affirmed their AAA credit ratings for the U.S. on Aug. 2, the day U.S. President Barack Obama signed a bill that ended the debt-ceiling impasse that had pushed the country to the edge of default. Moody’s and Fitch both said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

“We can ask why this agency took this decision based on figures that are not consensual,” French Finance Minister Francois Baroin said in an interview on RTL Radio yesterday. “There will be a debate in the U.S. about this decision. It’s one out of three agencies. It’s only one element.”

S&P currently gives 18 sovereign entities its top ranking, including Australia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt-to-GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P said in yesterday’s statement.

New Zealand

New Zealand is the only country other than the U.S. that has a AA+ rating from S&P and an Aaa grade from Moody’s. Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.

The debt downgrade and market slide are bound to hit the confidence of American consumers, said Mark Spindel, chief investment officer at Potomac River Capital, which manages $300 million in Washington.

“This is an upper-cut to confidence at the worst possible moment,” Spindel said before the G-7 announcement. “The downgrade mattered less. It is the path we have taken to get here: the meager recovery, the dys********al political environment, and the pathetic growth in employment, consumption and income that don’t seem to be moving back to sustainable levels.”

Confidence among consumers, whose spending accounts for 70 percent of the U.S. economy, fell to the lowest level in two years in July, a survey from Thomson Reuters/University of Michigan showed. The reached 63.7, the weakest since March 2009, when the economy contracted at a 6.7 percent annual rate.

Blackbaud Inc., a Charleston, South Carolina-based software company, and Blue Nile Inc., a Seattle-based online jewelry- retailer, both mentioned declining consumer confidence in earnings conference calls last week.

Fuente: Noda: G-7 to Inject Liquidity as Needed - Bloomberg

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