Financial turmoil strikes as G-7 works for revival

IQALUIT, Nunavut -- Global financial leaders gathered in a frigid Canadian town Friday to confront more market turmoil which served as an unsettling reminder that they still face major hurdles repairing a broken global economy.

The market turbulence, triggered by worries about unsustainable debt burdens in several European countries, forced its way onto the agenda of a two-day meeting of finance officials from the Group of Seven major industrial countries.

Canadian Finance Minister Jim Flaherty, the chair of the meetings, said that discussions about the situation in Europe had already begun among individual ministers before the first formal session, a dinner Friday night.

"I think we have to be very mindful of the failure or potential failure of domestic economies," Flaherty told reporters during a brief news conference.

Other major topics at the discussions, which were scheduled to wrap up with a joint news conference on Saturday, were global imbalances such as America's huge budget deficits and China's large trade surpluses, the need to continue with government stimulus programs and the overhaul of bank regulations to prevent a repeat of last year's financial crisis.

On one immediate challenge, Treasury Secretary Timothy Geithner said he planned to seek support for the International Monetary Fund and other lending agencies to forgive Haiti's debt and supply additional money to help it recover from the devastating earthquake.

Meeting Haiti's needs, he said in a statement, will require a "massive multilateral effort."

Geithner and Federal Reserve Chairman Ben Bernanke were attending the two days of meetings with their G-7 counterparts. The G-7 countries are the United States, Japan, Germany, France, Britain, Italy and Canada.

The meetings were taking place in the most unusual G-7 setting ever: a tiny outpost where temperatures can dip to 40 degrees below zero in February. Canadian Finance Minister Jim Flaherty invited the other finance officials to begin their Arctic stay with an afternoon of dogsledding.

Flaherty chose Iqaluit in part to drive home Canada's claim to a region that may contain one-fifth of the world's petroleum reserves.

On the issue of reforming banking regulations, the other G-7 countries were expected to press Geithner to explain the announcement by President Barack Obama last month that the United States would seek tougher rules to prevent risky actions by big banks from toppling the entire financial system.

Those proposals took the other G-7 countries by surprise, and several nations have questioned whether the U.S. rules were needed.

British Treasury chief Alistair Darling said he did not believe the U.S. proposal was the correct approach because it did not address the biggest threat, the links between banks that can quickly transmit loan troubles at one institution, like a virus, to the entire system. He appealed for a more coordinated approach.

"My fear is that cohesion of the last year is being lost," Darling said in an interview published Friday in Italy's Il Sole newspaper. "The last year, we were on the edge of the precipice and we were facing the prospect of a depression. We reacted together and we avoided that. I would like to continue to see the same sense of urgency that we saw then."

The topic of China's refusal to allow its currency to rise in value against the dollar, which critics see as a blatant effort to manipulate trade by making Chinese goods cheaper, would also be on the discussion agenda, Flaherty said.

"It is an issue that cannot be avoided," Flaherty told reporters.

U.S. stocks, down nearly 170 points in afternoon trading, clawed their way back to finish with a small gain of 10 on Friday.

Stocks had plunged on Thursday, with the Dow Jones industrial suffering the largest single-day drop in seven months, on worries about the global economy. There were concerns that three nations that share the joint euro currency -- Greece, Spain and Portugal -- were having trouble tightening budget controls to manage their budget deficits, a development that could threaten the economic recovery in Europe.

The bout of market turmoil provided a sobering reminder to global financial leaders that the aftershocks from the worst recession in seven decades are still being felt.

U.S. officials said Geithner would urge other G-7 nations to keep providing stimulus through the rest of this year, arguing that without continued government support the fledgling recoveries could falter, plunging the world back into recession.

Some countries have expressed concern about how long stimulus aid should be maintained. They worry about soaring budget deficits and the risk of inflation.

Geithner will likely point to the mistakes that nations made during the Great Depression, when a tentative rebound fizzled after governments withdrew emergency support too soon.

Obama presented a budget plan Monday that would boost job-creation efforts and raise the U.S. budget deficit to a record $1.56 trillion this year. He has pledged to make jobs his No. 1 priority in part to counter Republican charges that he spent too much time during his first year in office concentrating on health care reform.

British Prime Minister Gordon Brown, whose Labor Party is trailing in polls ahead of likely June elections, is also stressing government stimulus. Britain's budget deficit as a share of its gross domestic product could reach 12 percent this year.

In Japan, where the economy has struggled for two decades, the government unveiled more stimulus spending last week. Other G-7 nations also have stimulus measures still in place. But some politicians in Germany and France have raised concerns about stoking inflation.