'G-7 should consider bailout options on intl scale'

New York, Oct 11 (PTI) The finance ministers of Group
of Seven (G-7) rich nations meeting this weekend to consider
steps to meet the current market meltdown around the world
would have to deal with a major complex issue – how to manage
bailouts on international scale, a leading think tank has
said.

"For example, American banks lend to European banks.
If the United States comes up with a plan which guarantees
loans to US banks but not European banks, and Europeans lend
to Europe and not the United States, the integration of the
global economy will very quickly shatter, leading to
significant limitations on international trade, currency
convertibility and so on. You will nationalise economies that
can't stand being purely national," Stratfor says in an
analysis posted on its website.

It is not "too extreme" to say that the outcome of
these meetings could redefine how the financial markets work,
certainly for months and perhaps for a generation, it adds .

The Americans, it notes, are arguing that the regime
of intervention and bailouts be allowed to continue. Others,
like the British, are arguing for what in effect would be the
nationalisation of financial markets on a global scale.

The meetings will extend through the weekend to
include members of the G-20 countries, which together account
for about 90 percent of the global economy.

Underlying this political pressure, it said, is a
sense that the financial class, people who run global
financial institutions, have failed to behave responsibly and
effectively, and have therefore lost their legitimacy.

"The expectation, reasonable or not, is that the
political system will now supplant these managers and impose
at least a temporary solution. The finance ministers therefore
have a political mandate, almost global in scope, to act
decisively."

Stratfor points out the question: What they will do?
That question, it says, then divides further into two parts.

The first is whether they will try to craft a single,
global, integrated solution. The second is the degree to which
they will take control of the financial system — and
inter-financial institution lending in particular. (A primary
reason for the credit crunch is that banks are currently
afraid to lend — even to each other.)

Thus far, attempts at solutions on the whole have been
national rather than international. In addition, they have
been built around "incentivising" certain action and
increasing the available money in the system, it adds.

Stating that so far this hasn't worked, Stratfor says
the first problem is that financial institutions have not
increased interbank lending significantly because they are
concerned about the unknowns in the borrower's balance sheet,
and about the borrowers' ability to repay the loans.

"With even large institutions failing, the fear is
that other institutions will fail, but since the identity of
the ones that will fail is unknown, lending on any terms —
with or without government money — is imprudent.

There is more lending to non-financial corporations
than to financial ones because fewer unknowns are involved.
Therefore, in the United States, infusions and promises of
infusion of funds have not solved the basic problem: the
uncertain solvency of the borrower," it adds.

The second problem is the international character of
the crisis, it says, giving the example of the Icelandic
meltdown.

The government of Iceland, it pointed out, promised to
repay Icelandic depositors in the island country's failed
banks. They did not extend the guarantee to non-Icelandic
depositors. Partly they simply didn't have the cash, but
partly the view has been that taking care of one's own takes
priority.

"Countries do not want to bail out foreigners, and
different governments do not want to assume the liabilities of
other nations. The nature of political solutions is always
that politicians respond to their own constituencies, not to
people who can't vote for them," it adds.

The basic decisions to be made by the finance
ministers this weekend include whether to give the bailouts
time to work, to increase the packages or to accept that they
have failed and move to the next step.

The next step is for governments and central banks to
take over decision making from financial institutions, and
cause them to lend, it says adding this can be done in one of
two ways.

"The first is to guarantee the loans made between
financial institutions so that solvency is not an issue and
risk is eliminated. The second is to directly take over the
lending process, with the state dictating how much is lent to
whom.

"In a real sense, the distinction between the two is
not as significant as it appears. The market is abolished and
wealth is distributed through mechanisms created by the state,
with risk eliminated from the system, or more precisely,
transferred from the lender to the taxing authority of the
state," it adds.

There is, Stratfor says, no global mechanism for
managing radical solutions.

If the G-7 in effect nationalise global financial
systems and do it without international understandings and
coordination, the consequences will be immediate and serious,
it warns.

The G-7 is looking hard for a solution that will not
require this level of intrusion, both because they don't want
to abolish markets even temporarily, and more important,
because they have no idea how to manage this on a global
scale.

"They very much want to have the problem solved with
liquidity injections and bailouts. Their inclination is to
give the current regime some more time. The problem is that
the global equity markets are destroying value at extremely
high rates and declines are approaching historic levels," it
adds. PTI DS
PMR