Finance chiefs tackle market crisis in Portugal

EU finance chiefs are holding their second day of talks in Portugal today, with the global markets crisis expected to dominate discussion again.

Fears the crisis will spill over from the money markets into the general economy were given new life yesterday after the Bank of England said it had approved emergency funding for British mortgage provider Northern Rock.

Meeting for the first time since the collapse of the US subprime mortgage market caused jitters across financial markets, finance ministers and central bankers yesterday said the crisis should have minimal impact on a robust European economy.

However, they moved quickly to get to the heart of the problem, ordering a review of the transparency of complex financial instruments and the efficiency of risk management by banks and other institutions.

Fingers have been pointed at unregulated industries, such as private equity and hedge funds, for exacerbating the crisis.

Portuguese finance minister Fernando Teixeira dos Santos, who is hosting the gathering, indicated that the review could lead to greater regulation across Europe.

EU finance chiefs stuck to revised forecasts that this week put GDP growth for the euro area at 2.5% for 2007, down 0.1 percentage point from the spring forecast. Growth for the entire EU was put at 2.8% instead of 2.9%.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the effect of the market turbulence would be “very, very small,” but he acknowledged that “the risks to this outlook have increased to the downside, that risks for lower growth have increased in recent weeks and that uncertainties are also bigger.”

Finance chiefs are also discussing the potential effects of the soaring euro, after the currency rose to an all-time high against the US dollar for the second consecutive day last Thursday, of 1.3927 dollars.

While France, a big exporter of luxury goods to the United States, struggles with a high euro, Luxembourg prime minister Jean-Claude Juncker said that did not concern him as much as the weakness the currency experienced in the years after its introduction in 1999.

The main body of talks today will be followed by a half-day meeting with the 10 Mediterranean countries that are part of the Euro-Mediterranean Partnership, including Algeria, Egypt, Israel, Jordan and Turkey.