WASHINGTON - FINANCE leaders from the world's rich nations may need to offer more than just words this week as they struggle to avert a global recession.

Speculation is growing that Group of Seven countries may consider coordinated interest rate cuts to dull the credit crunch pain. A meeting in Washington on Friday on the eve of the International Monetary Fund's fall meeting would provide a perfect opportunity to talk it over.

Investors think short-term borrowing rates are heading lower across the G7 - the United States, Canada, Britain, France, Germany, Italy and Japan - now that oil prices are about 36 per cent below their July peak and recession alarms are growing louder.

'It's very clear that inflation is not the major battle to be fought right now.'

With European leaders at odds over whether to establish a bailout fund similar to the US$700 billion (S$1 trillion) plan approved in the United States on Friday, monetary policy may be one of the areas where the G7 can actually agree.

A Reuters poll of economists last week gave a 30 per cent chance of a coordinated cut by major central banks, up from 20 per cent in the prior week's survey.

Such a move would certainly carry risks. Some economists argue that rate cuts would do little to ease borrowing strains because banks will still be reluctant to part with cash as long as worries persist about bad debts.

Mr Alex Patelis, head of international economics at Merrill Lynch, said the likelihood of a joint rate move had increased but the odds were still against it because 'central banks would rather not see themselves act, only to be perceived as failing by the markets.'

Times are changing
The fact that this is even a topic of discussion shows how dramatically the last few weeks of financial market drama have darkened the global outlook.

Three months ago, the European Central Bank raised its benchmark interest rate and sounded far more concerned about price pressures than bank failures.

Since mid-September, Britain, Germany, Belgium, France, Luxembourg, Denmark, the Netherlands and Ireland have all had to step in to prop up banks or guarantee deposits. Central banks have poured hundreds of billions of dollars into financial markets as nervous banks cling to cash.

'The global economy will never be the same again,' British Prime Minister Gordon Brown said.

When this group gathered in Washington six months ago, it was just a few weeks after the US Federal Reserve stepped in to prevent the bankruptcy of Bear Stearns, and markets had settled into an uneasy calm that has since been shattered.

Back then, finance ministers scoffed at the IMF's prediction that credit losses may approach US$1 trillion. The IMF has since raised the estimate to US$1.3 trillion. Of 56 economists polled by Reuters last week, only four thought the figure was too high and 23 said it was too low.

The April meeting closed with a pledge to implement recommendations in a 74-page report on the credit crisis that now looks out of date. It contains only one short section addressing risky derivatives that contributed to the bankruptcy of Lehman Brothers and the US$85 billion bailout of AIG.

Mr Charles Dallara, managing director of the banking group Institute of International Finance, which includes many of the world's largest financial firms as its members, said world leaders need to take more decisive action this time.

'The global financial system is facing the most extraordinary challenges of the last eight decades, requiring prompt, internationally coordinated actions if a global recession is to be avoided,' he wrote in a letter to finance ministers and central bankers.

In a Reuters interview, Mr Dallara said Europe may need a 250 billion euro (S$497 billion) to 350 billion euro fund for troubled bank assets.

Former Italian Finance Minister Tommaso Padoa-Schioppa said Europe urgently needed a US-style bailout fund, while Britain's Brown dismissed the idea.

Mr Simon Johnson, who recently stepped down as the IMF's chief economist, said the US financial rescue plan 'may well bring this crisis under control, at least for a while.'

But he said European countries may also need to act, and he was 'worried that some of these governments do not yet understand the gravity of the situation.'

Even if disagreement bars a European bailout plan, the G7 will need to use its meeting to come up with better channels of communication and coordination to deal with a crisis that refuses to stay within US borders, said Brookings' Prasad.

'The United States has its hands full right now,' he said.