Global Markets Face 'Prolonged Adjustment'

The Financial Stability Forum urged G7 nations 'to rebuild confidence in the creditworthiness and robustness of financial institutions.'

A group of financial regulators and central bank officials warned the G7 rich nations on Feb. 9 that global markets could face a prolonged period of adjustment following the recent credit squeeze. While there has been an easing of conditions in money markets, there are growing worries about falling share prices and the health of financial institutions, experts from the Financial Stability Forum (FSF) said.

"There remains a risk that further shocks may lead to a recurrence of the acute liquidity pressures experienced last year. It is likely that we face a prolonged adjustment, which could be difficult," they said in interim report to finance ministers from the Group of Seven rich nations.

The world's top central banks joined forces to pump billions of dollars into ailing financial markets last year to ease the credit crunch. While the action helped to ease pressure in credit markets, many banks have suffered heavy losses on mortgage-backed securities gone sour. The report urged efforts "to rebuild confidence in the creditworthiness and robustness of financial institutions."

"There's a sense that the banking sector needs to be recapitalised," said Bank of Italy governor Mario Draghi, who chairs the Financial Stability Forum. "More capital is better than less capital," he said as he presented the report, which was commissioned by the G7 in October in an effort to tackle the growing financial market distressed triggered by a U.S. housing slump.

Credit rating agencies must also "address conflict of interests," Draghi said, following criticism of the agencies for not warning investors about an impending global credit crunch.

The report, which will be finalized by April, recommended better disclosure of risk and an improvement in financial market transparency.

The FSF, based in Basel, Switzerland, was established in 1999 after the Asian financial crisis. It is comprised of financial experts from the G7 members and major international financial organisations.

Copyright Agence France-Presse, 2008

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