G7 sees world economy on way up: Reassuring noises from finance ministers, but the problems over Japan and Russia remain unresolved

IN A CONCERTED effort to steady jittery international markets, finance ministers from the world's seven richest nations painted an encouraging picture of a recovering world economy at their weekend gathering near Frankfurt.

The G7 finance ministers, accompanied by central bank heads, emphasised that inflation was not a worry and that the recent upward lurch in long-term interest rates was a temporary phenomenon.

But, for all their efforts to spread optimism, the meeting made no significant progress on two issues which have contributed to the nervousness on international markets. A special meeting between the American and Japanese delegations produced no breakthrough in their bitter trade dispute and no clear commitment from Japan's partners to stem the rapidly rising yen.

Despite pledges from senior Moscow officials that the reform process is continuing, the G7 ministers remained deeply sceptical about the prospects for economic stabilisation in Russia. The release of further aid to Russia was firmly tied to visible progress in the fight against inflation and curbing the budget deficit.

While the rise in long-bond yields was cause for concern during the talks on Saturday, G7 participants were anxious afterwards to play down the matter. Hans Tietmeyer, the president of the Bundesbank, described the recent rise as an over-correction. 'Things will return to calm because US inflation is under control,' he said.

Kenneth Clarke, the Chancellor of the Exchequer, spoke of the encouraging prospects for international growth because 'there are no inflationary pressures at work'.

Lloyd Bentsen, the US Treasury Secretary, reported 'a general sense that the worst of the recent downturn is behind us. There are encouraging signs in most industrial countries. We have begun to lay the basis for a sustained recovery'.

Mr Bentsen found much less good to say, however, of his talks with Hirohisa Fujii, his Japanese counterpart. All the Japanese proposals so far on opening up the market and on stimulating domestic growth - in an effort to reduce the massive trade surplus - were judged insufficient by Mr Bentsen.

'The budget stimulus package is not enough to produce the sort of domestic demand that will have any significant effect on the trade imbalance,' he added.

While less forthright than they had hoped for, the Japanese did get some understanding from their G7 partners for the problems caused by the rising yen.

'We agreed it would be silly to try to achieve a rebalancing of the trade relationship by modifying exchange rates,' said Piero Barrucci, the Italian finance minister. 'The only policy is Japanese growth.'

Told of the IMF's view that Russia is heading for hyper-inflation, ministers came to the meeting in sceptical mood and heard little to change their minds. While welcoming assurances that the reforms were continuing, Mr Clarke said: 'We do not just want to see plans, but also the credibility and likelihood of these being implemented.'

The 7-9 per cent monthly target for inflation and the goal of a budget deficit of 5 per cent of GDP, offered by Sergei Dubinin, the Russian finance minister, were described by Mr Bentsen as ambitious and difficult. 'They have to set in place credible things to get more loans, things that give us confidence they can actually attain these goals,' he said.

The IMF has been instructed to draw up in detail what the Russians need to do to get more money, both on the macro-economic front and in strengthening their administrative and legal framework, regarded as essential preconditions for encouraging private investment.

The G7 ministers sought to soften this tough stance by stressing the importance of securing Russian popular support for the difficult economic changes by building a social security system.

They said that dollars 500m of World Bank credits should be channelled to this end at local level, but emphasised that this money would be focused on advice, and that the real funding would have to come from domestic Russian sources.