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Analysis: At economic summit, leaders careful not to spook world’s markets

At economic summit, leaders cognizant of need not to spook world’s markets

LONDON – Global leaders are keeping a nervous eye on world markets as they try to fix their ailing economies. From New York to Tokyo, investors stand ready to instantly grade the summit of the world’s 20 biggest economic powers.

As leaders gathered, the U.S. recession that triggered the global crisis entered its 17th month on Wednesday, making it the longest downturn since the decade-long Great Depression. It has now surpassed two previous postwar U.S. recessions that each lasted 16 months, in 1973-75 and 1981-82.

After the Dow Jones industrials’ worst first quarter in 70 years, Wall Street finished higher in trading on Wednesday and major indexes closed higher in Europe. But markets could sink fast if world leaders fail to present a united front at their meeting on Thursday.

Usually, leaders at international forums care little about what markets are doing and markets pay little attention to such forums. Their predictable and vaguely written communiques rarely move the numbers.

And after all, who can predict market movements? Gauging how markets might react can be a futile exercise.

But in this case, plunging stock markets around the world are not only a symptom of the larger problem, they are part of the problem.

Trillions of dollars of wealth have disappeared from pensions, endowments, nest eggs and home values. The market slides have sapped consumer confidence and spending in developed countries and slammed developing ones that rely heavily on their exports.

In the United States, nearly half of households own securities, either directly or indirectly through 401(k) and other retirement plans. That’s more than ever before in a time of severe economic downturn. Stock ownership also is up in other industrialized nations.

Summit partners don’t want to unnecessarily spook the markets. And that injects an additional degree of caution into their deliberations.

There’s no way to tell what markets might view as acceptable accomplishments. And since much of the present global decline is caused by lack of confidence, markets are looking for signs of returning confidence.

And this is one of the places they’re looking.

British Prime Minister Gordon Brown and President Barack Obama both sought to show cautious confidence at their joint news conference on Wednesday.

Obama urged Americans, and consumers across the globe, to show confidence in the ability of the global economy to recover. “Don’t short change the future because of fear in the present, that I think is the most important message we can send – not just in the United States, but around the world,” Obama said.

Said Brown: “It will get worse if people do not act.”

But tensions simmered just beneath the surface.

Hours before the leaders were to sit down for dinner, French President Nicolas Sarkozy vowed to keep fighting for stronger international financial regulation, especially of tax havens, saying in an interview with Europe 1 radio that he would not associate himself with “false compromises.”

Later, Sarkozy was asked about tensions between Europe and the United states and threats that he might walk out of the meeting. “I have confidence in Obama,” he told reporters. “I am sure that he will help us and that he will understand us.”

Few expect the gathering to endorse either the bold stimulus spending that the U.S. and Britain have advocated nor the tough new international financial regulation that France, Germany and some other European countries want. Instead, the gathering was expected to endorse a mix of measured steps, including increased coordination in regulation, more money for the International Monetary Fund and a modest amount of stimulus spending, much of it already announced.

“My sense is that it will be a credible and legitimate package of steps both on the restoring-growth side and on the regulatory-reform side. And how the market reacts to that remains to be seen,” said Mike Froman, a White House international economics adviser.

Markets hate uncertainty.

When Treasury Secretary Timothy Geithner first outlined the Obama administration’s bank-rescue plan in early February, the Dow Jones industrials plunged 300 points, mainly over the plan’s lack of details. When he later filled in the blanks with a detailed plan, it soared nearly 500 points.

And Geithner briefly unsettled currency markets a week ago when he appeared willing to entertain a Chinese proposal that an international currency replace the U.S. dollar as the world’s main reserve currency – a notion he quickly dispelled.

Recent reports suggest the world economy is weakening, not strengthening.

“The world economy is in the midst of its deepest and most synchronized recession in our lifetimes,” wrote Klaus Schmidt-Hebbel, chief economist at the Organization for Economic Cooperation and Development, in a report this week predicting the world economy would shrink this year for the first time since World War II, by 2.75 percent. He also wrote that trade would further contract sharply.

Of course, if markets hate uncertainty, there can also be the certainty of low expectations.

What if the summit is viewed as a flop?

“I think flop is pretty well built into expectations,” said David Wyss, chief economist of Standard and Poor’s in New York.

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