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Ghost of Lehman Haunts G-7 Amid Debt Crisis

Europe’s finance chiefs will face international calls today to accelerate efforts to contain their debt crisis as mounting bets on a Greek default highlight the biggest threat to the global economy.

As central bankers and finance ministers from the Group of Seven nations convene in Marseille, France, for their first face-to-face talks since they promised “coordinated action” Aug. 8 to calm financial markets, Europe’s failure to stamp out investor worries over sovereign debts are set to be the focus.

Any global recession “will have Europe’s fingerprints on it,” said Constance Hunter, who helps manage about $12 billion as chief economist at Aladdin Capital Management LLP in Stamford, Connecticut. “Europe is the real risk.”

It’s not the only risk as policy makers race to head off a recurrence of the contraction, the worst since the Great Depression, that followed the collapse of Lehman Brothers Holdings Inc. three years ago this month. The Organization for Economic Cooperation and Development yesterday said the G-7 will barely expand in the final quarter as the euro region shrinks.

Every G-7 member is fighting on multiple fronts to prevent the slowdown from turning into a global slump. Central bankers are signaling easier monetary policy. President Barack Obama last night announced a renewed effort to cut the 9.1 percent jobless rate. Japan is struggling to prevent a stronger yen from undermining exports. Benchmark interest rates are already at record lows and public debt at unprecedented highs.

‘Getting Worse’

“Things are getting worse and the big difference between now and a few years ago is that this time around we’re running out of policy bullets,” Nouriel Roubini, chairman of New York- based Roubini Global Economics LLC, said in a Sept. 6 interview. “There is a 60 percent probability of another economic contraction in most advanced economies.”

Credit-default swaps on Greek debt yesterday surged to a record, signaling a 91 percent chance the nation will fail to meet debt commitments. A measure of banks’ reluctance to lend to each other in Europe this week rose to the highest in almost 2 1/2 years and about $5 trillion has been wiped off global equity markets since the start of July as debt fears rippled around the world.

“The possibility of a European Lehman Brothers should keep us all awake at night,” Harvard University professor Niall Ferguson told Bloomberg Television’s “Inside Track” with Deirdre Bolton and Erik Schatzker on Sept. 6. Deutsche Bank AG Chief Executive Officer Josef Ackermann said Sept. 5 that conditions “remind one of the fall of 2008.”

Europe Pressed

Officials arriving for the gathering share the view that Europe needs to do more to put its financial house in order.

U.S. Treasury Secretary Timothy F. Geithner will urge Francois Baroin and Wolfgang Schaeuble, his French and German counterparts, to take “more forceful action” to protect banks and ensure governments can borrow at sustainable interest rates, according to an opinion piece in the Financial Times yesterday.

World Bank President Robert Zoellick said Sept. 6 that Europe’s outlook depends on political decisions. International Monetary Fund Managing Director Christine Lagarde has called on the region to recapitalize its banks -- forcibly, if needed -- and avoid tightening monetary and fiscal policies too much.

Lagarde may use the talks to step up the IMF’s “communication in terms of trying to find support as far as growth is concerned,” Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc, said in a radio interview on “Bloomberg Surveillance” with Tom Keene.

‘Negative Feedback Loop’

Morgan Stanley economists led by Joachim Fels told clients Sept. 7 that with fiscal policy tapped out and a “negative feedback loop between weak growth and soft asset markets,” central banks may ease monetary policy in lockstep as soon as this weekend.

Underscoring the growth concerns, European Central Bank President Jean-Claude Trichet yesterday cited “particularly high uncertainty and intensified downside risks” to the economy. Federal Reserve Chairman Ben S. Bernanke said hours later that U.S. policy makers will this month discuss the tools they could use to boost the recovery and stand ready to use them.

Elsewhere, the Swiss National Bank on Sept. 6 imposed a ceiling on its franc after it soared to a record against the euro, damaging exports, as investors sought a haven from Europe’s woes. Central banks from Brazil, Canada, Sweden, Australia and the Czech Republic this week indicated a willingness to keep monetary policy loose.

‘All Necessary Measures’

The G-7 officials meet in the southern French port tonight and tomorrow. While there will be no formal statement, Baroin will brief reporters after the talks end at 2:15 p.m. tomorrow. In their joint comment last month, they vowed to “take all necessary measures to support financial stability and growth” after a U.S. sovereign-rating cut and a slide in Italian and Spanish debt.

The policy makers gather as the euro area’s debt turmoil continues to defy remedies almost two years since it began in Greece. It required bailouts in Portugal and Ireland and last month forced the ECB to buy Spanish and Italian government bonds to stem a market rout.

Dogged by voter unrest and ideological splits, Europe’s leaders are adding to investor unease as they argue over the terms of bailouts, with Finland demanding collateral from Greece and German lawmakers seeking veto power. They have also dithered over a revamp and management of their regional rescue fund and fallen short of the closer fiscal ties investors say are necessary to protect the euro’s long-term future.

Biggest Risk

Sixty-four percent of fund managers surveyed by BofA- Merrill Lynch last month identified Europe’s debt crisis as the world’s biggest risk, up from 43 percent in July. That contrasts with three years ago this weekend when European finance ministers gathered along the same coast, in Nice, took aim at the U.S. for destabilizing the world economy. Days later they began criticizing the U.S. for letting Lehman fail.

As then, the danger is one economy’s woes are transmitted either by hurting global trade, slamming bank balance sheets or freezing financial markets, said Jim O’Neill, chairman of Goldman Sachs Asset Management.

“You could spend the last decade focusing on the U.S. and China and not really worry about anything in Europe,” said O’Neill. “What we now have is a whole complex interplay where Europe could cause significant damage beyond its own borders.”

To contact the reporters on this story: Simon Kennedy in Marseille, France, at skennedy4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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