Up until Thursday afternoon, many analysts had been impressed with the action in the stock market. In particular, the big rebound seen in response to Tuesday’s decline suggested that traders might be looking ahead to brighter days.
At least part of the cause for the renewed optimism was the upcoming G-7 meeting. Reports began to circulate that the G-7 might be planning some sort of coordinated response to the European debt crisis with Morgan Stanley writing that we should expect to see something as early as this weekend.
With the global macro outlook becoming rather dim lately, some analysts believe that only a “shock and awe” response from the likes of the G-7 can keep the global economy out of recession. As such, hopes began to run high into the end of the week as the G-7 was set to meet in Marseilles, France.
However, U.S. Treasury Secretary Timothy Geithner threw cold water on the idea Friday when he told Bloomberg that there would be “no coordinated global policy” coming out of this weekend’s meeting.
Then when ECB Executive Board Member Juergen Stark announced his resignation on Friday, it became clear that the globe’s major players are clearly not all on the same page at the moment.
In fact, media reports have alluded this weekend to a fair amount of tension and strong disagreements coming out of the G7 meeting.
However, they issued a brief joint statement committing to working together:
"We meet at a time of new challenges to global economic recovery with significant challenges to growth, fiscal deficits and sovereign debt stemming from past accumulated imbalances," the G7 said. "This is reflected in heightened tensions in global financial markets."But we are committed to strong and coordinated international response to these challenges."
The G-7 communiqué went on to say, “We are taking strong actions to maintain financial stability, restore confidence and support growth. In the US, President Obama has put forward a significant package to strengthen growth and employment through public investments, tax incentives, and targeted jobs measures, combined with fiscal reforms designed to restore fiscal sustainability over the medium term. Euro area countries are implementing the decisions taken on July 21 to address financial tensions, notably through the flexibilisation of the EFSF, reaffirming their inflexible determination to honor fully their own individual sovereign signatures and their commitments to sustainable fiscal conditions and structural reforms. Japan is implementing substantial fiscal measures for reconstruction from the earthquake while ensuring the commitment to medium-term fiscal consolidation.”
At the same time, reports emerged which were somewhat disturbing as IMF head Christine Lagarde addressed some mysterious discrepancies in estimates of European bank capitalization needs.
No further details beyond the following Reuters report are available at this time, but the crux of the report does not sound good.
IMF chief Christine Lagarde said on Saturday that reports of a draft IMF document showing a $273.2 billion shortfall in European banks' capital were misleading and the lender was still finalizing its study.
"There has been misreporting about the 200 billion euros, this number is tentative," Lagarde told a news conference after G7 and G8 finance talks in the southern French city of Marseilles.
"This is not a stress test that the IMF conducts nor is it the global capital need for European banking institutions, that it is not, and we are currently in discussions with our European partners to assess the global methodology until we reach a tentative draft. It will be published before the end of September."
However, the idea of large capital shortfalls at European banks is a new input and something to be watched closely.
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