Governments act to stem crisis, markets shaken

LONDON/BERLIN Mon Oct 6, 2008 8:39am EDT

1 of 12. German Finance Minister Peer Steinbrueck arrives for a party board meeting of the German Social Democratic party (SPD) in Berlin October 6, 2008.

Credit: Reuters/Johannes Eisele

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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 80 years.

However, the moves failed to comfort financial markets as investors from Tokyo to London slashed risk from portfolios and positioned for a further tightening of credit and bank lending and the rising risk of a 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 growth in the last three years were at the sharp end of market moves as the once abundant liquidity landscape that has fueled their growth became more arid.

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.

Governments across the globe battled to restore confidence.

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 the government was prepared to guarantee deposits unilaterally if the European Union did not act.

Finance ministers from the euro zone countries were to meet in Luxembourg 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 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 and Dexia.

Trading in shares of Italy's UniCredit was suspended 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 pan-European FTSEurofirst 300 stock index was down 5.3 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 across the world that the crisis was biting deeper.

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

-- Iceland's crown, a currency that has been a target for investors seeking high yields, tumbled 10 percent against the euro.

-- 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.

-- Vietnam said it had withdrawn funds from overseas banks and deposited them in Singapore and Hong Kong to reduce exposure to the crisis

-- The Bank of Japan offered to lend 1 trillion yen ($9.68 billion) against pooled collateral in an auction to inject liquidity into the market.

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

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