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By Xinhua
BRUSSELS: Financial turmoil will top the agenda
when leaders from the European Union (EU) member states gather here
for their annual spring summit later this week.
Six months after European financial markets were
victimized by the US sub-prime mortgage market crisis, EU leaders
were tasked to find a way out of the persistent turbulence, which
has become a major downside risk to the economy of the 27-nation
bloc.
In summer 2007, European financial markets
experienced a sudden and turbulent re-assessment of risk by
investors, as the default rate on US sub-prime mortgage loans
increased significantly.
Since the financial markets across the Atlantic
are deeply intertwined and interdependent, sub-prime losses in the
US quickly transmitted themselves via the securitization and credit
derivative markets to many corners of Europe and the rest of the
world.
Many European financial institutions, including
some big names like UBS, Credit Suisse and Fortis, suffered huge
losses resulting from mortgage-related investments.
Big losses from US market
It was estimated that world financial
institutions have so far registered a total loss of $215 billion
related to the US sub-prime mortgage crisis. Europe was the second
biggest victim after the US, with an estimated loss of $78.5
billion.
However, the list of European banks afflicted by
the crumbling US housing market is still growing. Such uncertainty
made financial institutions reluctant to lend, resulting in credit
squeeze, which forced the central banks to pump large quantities of
liquidity to the banking sector.
The problems have spread to other segments of
the financial system, such as commercial real estate securities,
bond insurers and highly leveraged private equity loans, which banks
continue holding, given the lack of outside investor interest for
buying them.
“Six months since this turmoil started we
still do not know how big the losses are,” Charlie McCreevy, EU
Commissioner for Internal Market and Services, said when addressing
the Chartered Insurance Institute in London last week.
McCreevy warned little knowledge about the
losses has undermined trust and confidence of investors and has
caused serious disruption in certain markets, not least in the
inter-bank markets.
“Without a clearer picture, restoring investor
and business confidence will remain a significant challenge,” he
said.
Economic forecast down
Official figures showed confidence of European
businesses and consumers has dropped below the long-term average,
raising alarm to the momentum of investment and private consumption,
the two growth engines.
In face of turmoil in financial markets, a sharp
slowdown in the United States and soaring commodity prices, the
European Commission last month revised down its economic forecast
for the EU.
According to the commission, the EU economy will
grow by 2 percent this year, slowing down from 2.9 percent in 2007.
Until now, the EU has not followed the United
States to cut interest rate or take emergency measures like the
S168-billion economic stimulus plan.
The European Commission president Jose Manuel
Barroso said last month he saw no current need for emergency
measures since the circumstances in Europe are not the same as those
in the United States.
“If we hasten into knee-jerk measures, we will
end up undermining the strong fundamentals on which our measured
confidence is based,” Barroso said.
Barroso said Europe must strive to deliver
growth, jobs, low inflation and low interest rates consistently over
time under the Lisbon Growth and Jobs Strategy.
At the upcoming summit, EU leaders were
scheduled to adopt the next three-year cycle of the Lisbon strategy,
ensuring that the process of reform and modernization will continue
to deliver results in the EU, providing additional security against
turbulence in international markets.
“Overall, the way for the EU to cope with the
current shocks facing the global economy is to maintain sound and
stable macro- economic policies supporting a balanced policy-mix and
continue the course of structural reforms,” the commission said in
a document prepared for the summit.
Deliver growth, jobs
“With the Lisbon strategy for growth and jobs,
the EU has the right policies and instruments to help it weather the
current storms and continue to deliver growth and jobs,” it said.
In addition to reforms on the macro-economic
level, EU leaders were also expected to endorse a series of lines of
action in the financial sector.
EU finance ministers agreed in October 2007 a
road map for reinforcing European and global financial regulation
and supervision to fill the gaps revealed by recent financial
turmoil in the wake of the US sub-prime crisis.
The roadmap is based on four key areas of work:
improving transparency, valuation of financial products,
strengthening prudential requirements and making markets function
better.
The commission said it asked EU leaders at the
summit to build on this road map and “go one step further” by
confirming at head of state and government level the principles
which will guide the EU internally and in international fora.
Proposed actions include improving information
provided by credit ratings agencies, encouraging prompt and full
disclosure of losses by financial institutions, improving early
warning systems on financial stability and stepping up cooperation
between regulatory authorities in the EU and globally.
Europe “can best retain the confidence of
market operators and consumers alike by remaining vigilant and
determined at times of added stress in the financial markets,
working with international partners to identify weaknesses and to
address these swiftly and effectively,” the Commission said.
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