Governments Struggling: 'Fear and Weakness'

By Reuters -  |  Posted 2008-10-06 Print this article Print

Investors from Tokyo to New York sold riskier assets in alarm at the prospect of further tightening of credit and bank lending and a potentially serious global economic recession. Despite concerted efforts to stem the crisis, investors were clearly seeking more concrete steps from authorities, perhaps in the form of coordinated action from next weekend's meeting of the Group of Seven industrial nations.


European banks have been hit hard by the fallout from a crisis that began in the United States when the housing market collapsed and bad mortgage debts multiplied.

The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession.

"We have a seriously weak and fear-driven market on our hands," said Tom Hougaard, chief market strategist at City Index in London.

The various deposit guarantee moves were putting intense pressure on countries such as Britain, which face the prospect of a drain in deposits from their banks.

Britain's government promised on Monday it would not leave ordinary savers unprotected but said it had no plans to respond immediately to the surprise move by Germany.

German Finance Minister Peer Steinbrueck said Berlin was working on a new plan to protect the entire German bank sector, not just individual institutions that came under stress.

"I am very much aware that at some point individual solutions are no longer enough," Steinbrueck told reporters.

He said officials were discussing a "Plan B" but made clear this would not be a Europe-wide solution that would mirror the $700 billion rescue package agreed in the United States.


In the battered banking industry, France's BNP Paribas scooped up the assets of Fortis in Belgium and Luxembourg for 14.5 billion euros ($19.71 billion) to stem a cash drain on Fortis.

Shares in Belgo-French financial services group Dexia fell as much as 22 percent even though its board said on Sunday the firm was able to deal with deteriorating markets.

Trading in shares of Italy's UniCredit were suspended several times after sharp falls following the bank's abrupt U-turn to boost capital by 6.6 billion euros amid what it called unprecedented market turmoil.

On a frantic weekend, Germany also clinched a revised rescue deal for lender Hypo Real Estate that will see commercial banks and insurers provide 15 billion euros in liquidity, on top of an initial pledge of 35 billion euros.

For its part, the U.S. Federal Reserve was pushing Citigroup Inc and rival Wells Fargo & Co to compromise over their competing bids for hobbled U.S. bank Wachovia Corp that could result in them carving up its assets.

None of the government moves was reassuring investors on Monday, however.

The Dow Jones industrial average was down around two percent shortly after the open.

The pan-European FTSEurofirst 300 stock index was off 5.1 percent, stocks in Asia-Pacific outside Japan dropped nearly 6.6 percent and Japan's Nikkei average hit a 4-1/2 year low.

In addition, demand for the relative safety of government bonds rose, with short-term euro zone debt yields falling sharply.


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