Global leaders vowing action to ease recession

World leaders are vowing to work together to overhaul the global financial system as they gathered Washington yesterday for a summit on wresting the global economy from recession and avoiding future meltdowns.

With summit host President George W. Bush in his final two months in office and President-elect Barack Obama not participating, expectations for a conclusive outcome were low. Nevertheless, European leaders pressed for commitments to prop up sagging activity.

"We need to agree on the importance of coordination of monetary and fiscal policy," British Prime Minister Gordon Brown said en route to the meeting that began with a White House dinner for political leaders last night. Finance ministers held a separate dinner at the US Treasury.

Fresh US and European data underlined the severity of the downturn that now faces policy-makers.

The eurozone tumbled into recession in the third quarter and US retail sales posted a record slump. Japan, the United States and Britain all are on the brink of recession, while China has slowed to destabilising levels.

Federal Reserve chairman Ben Bernanke, speaking in Frankfurt at a European Central Bank conference, said yesterday that central bankers around the world stood ready to do more to ease credit strains.

The Washington summit, which concludes today, brings together leaders from 19 nations and the European Union.

It is officially a Group of 20 meeting, seating chiefs from key emerging markets like China, Brazil, India and South Africa with old-line industrial powers from the Group of Seven in what is likely the power constellation of the future.

But within the group many divisions remain.

Mr Bush on Thursday pitched for only modest reforms to preserve free markets, rather than stiffer financial regulation that some European nations favour to curb the excesses of capitalism.

Financial oversight bodies proposed no major revamp of the world regulatory order.

Rather, the International Monetary Fund and the Financial Stability Forum, a group of finance authorities from leading countries, agreed to a three-tier regulatory plan that would keep the IMF's global oversight role, boost the FSF's role in laying out standards for supervision and keep national authorities in charge of implementing them.

But some emerging market countries seek more radical action. China is flush with foreign exchange reserves of nearly $2 trillion. Saudi Arabia also holds ample reserves and some want to tap part of those reserves to more fully fund institutions like the IMF, equipping them to rescue smaller economies now getting hard hit by the financial crisis.

This gives new countries the muscle to demand a stronger say in the world financial order.

Japan's Prime Minister Taro Aso on Thursday offered to lend up to $100 billion from its $980 billion of foreign reserves to the IMF and pledged support for a dollar-based currency system in what seemed like a shot across the bow of French President Nicolas Sarkozy.

Mr Sarkozy said he would use the summit, the first in a series, to make the point that the US dollar, the linchpin of the global economic system since the Bretton Woods agreement of 1944, shouldn't keep its dominance.