With crisis spreading, G-20 leaders eye quick relief

The G-20 nations, representing most of the world's economy and population, are convening with the knowledge that they will sink or swim together.

SOURCE: Merrill Lynch/Rich Clabaugh/STAFF

A meeting of world leaders this week probably won't reach any grand conclusions about how to fix a broken financial system, but it could result in some immediate relief – possibly new commitments to stimulate faltering global growth.

The need now appears urgent, economists say.

A year ago the financial crisis was US-centered and associated with fallout from a housing downturn. Today it is global. Some European nations appear more vulnerable than the United States, and growth in Asia is sputtering.

The so-called G-20 nations, representing most of the world's economy and population, are convening with the knowledge that they will sink or swim together. What happens in one nation quickly ripples to affect others.

"All countries are moving into a new danger zone with heightened risks to exports and investment [and] budgets," World Bank President Robert Zoellick said last weekend. "We need to make sure that the financial crisis doesn't become a human crisis."

In fact, the International Monetary Fund (IMF), a sibling of the World Bank, has put out a new forecast that for the first time since World War II, the advanced nations of the world would all be in recession next year, with economic activity shrinking collectively by 0.3 percent.

Although the focus is on how advanced nations can steer back on course for growth, Mr. Zoellick says the threat of a humanitarian crisis centers on the poorest nations, which may be caught up in the storm. On Tuesday, he announced that the World Bank would boost financial support for developing countries, with as much as $100 billion in new loans over the next three years.

That move may set the stage for more actions Nov. 14-15 as President Bush hosts the G-20 leaders. The Group of 20 includes the Group of Seven advanced economies (Britain, Canada, France, Germany, Italy, Japan, and the US) plus fast-growing emerging nations, including China and Brazil.

Already in recent weeks, central banks worldwide have been cutting interest rates to try to offset the global slump. And many nations have pledged to inject capital into banks and provide new guarantees for loans in order to restore faltering confidence in the financial system. A next logical step, many economists agree, is a large and concerted provision of fiscal stimulus by governments around the world.

In recent days, China has announced a large stimulus package including money for construction projects and assistance for the poor. The US Congress is also working on its own new stimulus efforts. European Union nations are moving down this track as well.

Simon Johnson, an economist at the MIT Sloan School of Management in Cambridge, Mass., says the best-case outcome for the G-20 meeting would be large and coordinated stimulus pledges, plus new money for the IMF to help emerging-market nations avoid their own credit crises. "We're in a big global recession, and it won't get any better" without coordinated action, says Mr. Johnson, a former IMF chief economist.

But Europe has fallen behind the US in responding to the crisis, he says, and the question is whether the G-20 meeting will achieve big enough results. "They'll do a bit, [but] it won't be big enough," Johnson predicts.

The meeting will also help to set the stage for future work on how to improve global regulation of the financial system.

In a press briefing Wednesday, US Treasury Secretary Henry Paulson said America doesn't bear all the blame for the world's economic troubles. With scores of nations relying on an export-oriented strategy for economic growth, the result is an imbalanced world economy, he said.

Many economists agree: An imperative is not just for sounder bank regulation, but for a world economy where fewer nations rely on the US as the big consumer.

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