Governments Struggle to Stem Financial Crisis

 
 
By Reuters -  |  Posted 2008-10-06
 
 
 

LONDON/BERLIN (Reuters) - More European governments followed Germany's lead on Monday offering guarantees to savers in a frantic effort to calm fears among investors over the worst financial crisis in nearly 80 years.

The moves failed to comfort financial markets. 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.

Economies that gained most from the boom in commodities demand and surging global expansion in the last three years were at the sharp end of market moves.

Russia halted share trading for an hour after its benchmark stock index sank more than 14 percent to a three-year low, while Gulf equities crumbled as fears mounted that the fallout from Europe and the U.S. would strike the region.

Iceland's crown tumbled 20 percent against the euro after the government failed to produce a stability plan over the weekend.

The country has been a prime target for foreign deposits over the past few years because of its high interest rates. Demand is now unwinding rapidly as investors flee anything considered risky.

Governments and financial authorities across the globe, meanwhile, battled to restore confidence.

The Bank of Japan offered to lend 1 trillion yen ($9.68 billion) to banks in an auction to inject liquidity into the market. South Korea said it wanted crisis talks with Japan and China.

Sweden became the latest European Union country to act, with the government saying it would expand bank deposit guarantees and the central bank raising the amount of loans offered to banks.

It followed Germany's pledge on Sunday to guarantee private deposit accounts, a move which spurred similar action by Austria and Denmark. Ireland issued the first such guarantee last week, prompting criticism of a fragmented European Union response.

In Spain, Economy Minister Pedro Solbes said his government was prepared to guarantee deposits unilaterally if the European Union did not act.

"If there isn't (an EU agreement) as soon as possible, we will consider our position and if we have to take a decision we will do so," Solbes said.

Finance ministers from the euro zone countries were to meet in Luxembourg later on Monday.

"FEAR AND WEAKNESS"

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.

BANKING WOES

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.

SPREADING CRISIS

There were signs that the crisis was biting deeper across the world.

-- South Korea said it would dip into the world's sixth-largest foreign exchange reserves to help with loans.

-- Stock markets crumbled and credit conditions tightened in the Gulf, a boom area for investors over the past few years as a result of an influx of oil money.

-- Bankers in Pakistan called for urgent central bank action to stop the liquidity crunch putting banks in jeopardy as overnight call rates closed between 25 and 28 percent.

(Additional reporting from Milan, Paris, Frankfurt, Brussels, Luxembourg, New York, Washington, Sydney, Seoul, Beijing, Stockholm, Hanoi, Dubai, Karachi)