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Investors focus on G7 with Enron on their minds

When the world's top finance ministers and central bankers meet this weekend to discuss the health of the global economy, fallout from the collapse of Enron Corp. will take center stage for financial markets.

Financial leaders of the Group of Seven industrialized countries meeting in Ottawa are expected to concentrate on economic issues amid hopes that the United States is poised to lead a world recovery.

While discussions about Enron are likely to be a side-issue at the G7 summit, investors will keep a close watch on any discussion about the scandal-ridden implosion of the energy trading giant -- an issue that has weighed heavily on markets.

"Accounting standards are the top concerns for financial markets right now. The Enron disaster has basically put accounting standards in the spotlight," said Rob Palombi, senior fixed-income economist at Standard and Poor's.

Analysts say the G7 meeting would be an ideal place for the world's top financial officials to try to calm rattled investors. But they may get little more than soothing words.

"Certainly if they could come up with more transparency, greater accountability, greater responsibility by economic agents in the marketplace, that's good for everyone," said Farid Abolfathi, an analyst at international economic forecasting and consultancy DRI-WEFA.

Wall Street stocks were rattled this week by Enron and fears of accounting scandals at other corporate high-flyers. The market suffered its longest losing streak since Sept. 11 before recovering on Friday.

Even foreign exchange markets have been affected. Analysts say the accounting concerns have taken the edge off the strong dollar, which recently shot up to six-month highs against the euro and three-year highs against the yen.

Foreign exchange issues, which often take center stage when the G7 powers put their heads together, are not expected to top the agenda.

Japan, the weakest economy in the G7 group, is expected to face criticism for not doing enough to address its grinding recession and increasingly frail banking sector. East Asian nations and US manufacturers have howled that Japan is trying to talk down the yen to give its exporters a competitive advantage in world markets.

But worries over the health of corporate America have displaced currency market preoccupation with Japanese and US foreign exchange policy.

"When markets drift out of the realm they are familiar with, they can act more irrationally," said Paul Podolsky, currency strategist at Fleet Global Markets in Boston. "They don't know how price LTCM, they don't know how to price Enron," he added, referring to Long Term Capital Management -- the hedge fund that roiled financial markets when it collapsed in 1998.

The link between Enron and LTCM is one that US officials have taken great pains to downplay.

Can G7 quell Enron fear factor?

On Thursday, a day before leaving for Ottawa, US Treasury Secretary Paul O'Neill also tried to soothe the angst, making it very clear that Enron was not on the G7's formal agenda.

Analysts say there is little G7 leaders can do to soothe the worries about US accounting scandals rippling through financial markets.

Others say financial markets may not be comforted even if the G7 does hit the right notes.

"If the regulators and governmental officials say 'We'll fix that problem in the future,' that will be fine," said Douglas Lee, president of Economics From Washington, a private political consultancy.

"But what the markets are concerned about is the quality of earnings," he added. "Do other companies have problems similar to Enron that could affect the quality of earnings? What the government bodies have to say on the subject is not very relevant because you either have good quality earnings or you don't," Lee said.

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