London - A global credit crisis had increased the threat to growth, the European Central Bank (ECB) said yesterday, as Group of Seven (G7) financial heavyweight governments asked for a report on the origin of the turmoil for next month's meeting of finance chiefs.
US treasury secretary Henry Paulson said his economy would be hurt by the upheaval, but the overall outlook remained benign.
"There will be a penalty but the backdrop of the strength of the economy, the corporations, the institutions, is such that we are resilient," Paulson said.
The ECB's monthly bulletin said global economic activity remained robust, supported mainly by buoyant emerging economies.
However, it added: "While the global repercussions of the US economic slowdown have so far been limited, it remains to be seen whether the recent financial market turmoil will lead to a lasting reappraisal of global financial market risks and a loss in confidence with possible implications for the real economy."
ECB governing council member Erkki Liikanen said it would take months for financial markets to return to normal after the liquidity crunch.
"The faster the transparency increases on the market, the faster markets will normalise," said Liikanen. "It is not a question of weeks, more a question of months."
The G7's Financial Stability Forum will examine financial institutions' liquidity, credit risk practices, accounting and valuation procedures for complex derivatives, supervisory principles and the role played by credit rating agencies.
The forum consists of a group of finance ministers, central bankers and regulators.
Central banks globally have poured cash into money markets over the past month to ease the liquidity squeeze and sky-high interbank lending rates, but have stressed they are not coming to the rescue of risky investments.
"Investors will not be bailed out because of their bad decisions," Liikanen said.
Yesterday the Bank of England offered commercial banks additional room to adjust the amount of cash they hold at the central bank, in a bid to bring overnight interest rates down.
The US Federal Reserve is expected to cut its federal funds rate by as much as 50 basis points next week.
This is a bid to help relieve economic pressures, stemming from mass defaults on US subprime mortgages granted mainly to poor people.
This is only one of a host of factors which will go a long way to determining the depth of the crisis. - Reuters