THE main industrial nations have unveiled a new strategy designed to head off further shocks to the world economy and restore order to financial markets.
A new fund is to be established to support developing countries in financial difficulties as part of a range of measures intended to rebuild confidence in the international financial system .
The Group of Seven industrial nations (G7) announced the plan yesterday, gaining a positive response from world stock markets. However, nervousness remains about whether some pledges - such as the plan to help the troubled Japanese banking system - can be turned into action.
The G7 promised to continue with expansionary macroeconomic policies, a signal that interest rates are likely to remain low and could fall further. US interest rates have already been reduced twice and political pressure is growing for further reductions in core European interest rates.
The Central Bank of Ireland may announce a further reduction in Irish interest rates - perhaps as early as Monday - towards the levels in France and Germany.
While the Bundesbank has been holding out against further reductions in its rates, speculation remains that core EU rates could be further cut in December or January if the international economy remains under threat. This would lead to further cuts in Irish rates, beyond the further drop of 1.6 percentage points to existing French/German levels which is now inevitable before the end of the year.
The G7 move and news that the US economy expanded much more rapidly than expected during the third quarter of the year encouraged international stock markets, with the Dow Jones index closing more than 1 per cent higher yesterday evening.
The proposal to provide a new contingency fund to support economies in difficulty - which will come from further funding of $90 billion for the International Monetary Fund - is central to the G7 efforts to stop the spread of the financial "contagion" which has led to months of turmoil in the world economy. The measure was first suggested by President Clinton at the G7 annual meeting in Washington this month.
Brazil may be the first beneficiary, as its officials travel to Washington to discuss a $30 billion refinancing package.
In establishing the new fund, the Group of Seven has recognised that the IMF's procedures used to rescue Asian economies were too slow and cumbersome and by imposing overly strict conditions may have contributed to the rapid slowdown in global economic growth - which has been halved to 2 per cent by this year's crisis.
To prevent the outbreak of future crises the G7 said it would adopt reforms to cope with globally integrated financial markets where money can be moved around the world instantaneously.
At the heart of the new approach is a commitment to adopt transparent policies, so that difficulties can be spotted before they escalate into a crisis, including compliance with new codes of conduct on fiscal, monetary and financial policy.
To enhance stability there will be closer co-operation between financial regulators worldwide.
The G7 statement said it looked forward to the conclusions of Bundesbank president, Mr Hans Tietmeyer, who has been assigned to look at the idea of establishing a standing committee on global financial regulation, comprising representatives of institutions such as the IMF and the Basle committee of central bank governors.
--(Additional reporting: Guardian Service)
