Financial markets near complete freeze

By Natsuko Waki

LONDON (Reuters) - Investors will be seeing this week whether policymakers found a way to pull markets away from a deeper collapse as global capital markets faced complete freeze-up.

The global financial system was on the brink of meltdown, the International Monetary Fund warned on Saturday, a day after finance chiefs from the Group of Seven rich nations failed to agree on concrete, joint measures to end the crisis.

In a brief statement after their Washington talks, the G7 stopped short of backing a British plan to guarantee lending between banks, something many on Wall Street saw as vital to end growing market panic.

European leaders then raced on Sunday to produce their own deal at a summit in Paris, the focus fixed firmly on how much state money governments could mobilize to buy into banks if needed, and if they would also underwrite lending between banks, paralyzed for now by fear and distrust.

Analysts say policymakers must avert a wholesale breakdown in cross-border capital and investment flows after the tumult of last week saw investors dumping everything from stocks, bonds, oil and commodities in a panic dash for cash.

Capital markets were already grinding to a halt in many parts of the world with equity trading only briefly or completely suspended in Russia, Iceland, Romania, Italy, Austria, Ukraine, Peru and Indonesia last week.

"The crisis is moving with an astonishing speed and international flows of funds are freezing rapidly," said Lena Komileva, head of G7 market economics at Tullett Prebon.

She said the lack of specific steps from the weekend G7 meeting was likely to disappoint investors, threatening to cause more damage across risk asset classes this week.

"The economic crisis has political and social costs. The backlash of falling equities and disrupted credit channels could possibly result in protectionism taking hold, which would cause severe damage to the global economy," Komileva said.

This week, investors will receive key third-quarter corporate earnings results from major banks and companies which will reveal the scale of damage suffered by the real economy from market turbulence which erupted in August 2007.

JP Morgan (JPM.N), Wells Fargo (WFC.N), Bank of New York Mellon (BK.N), Citigroup (C.N), and Merrill Lynch MER.N are among banks which will unveil earnings for the three months ending September, the month when Lehman Brothers collapsed and several U.S. and European financial firms were bailed out.

Results from Intel (INTC.O), Google (GOOG.O), Nokia (NOK1V.HE) and Philips Electronics (PHG.AS) are also due.

PANIC AND FEAR

World stocks, measured by the MSCI index, lost a fifth of their value last week, tumbling to a five-year low as investors grew concerned that major economies will sink into recession, wiping out corporate profits and damaging consumption.

Barclays Capital estimates the trailing price-to-earnings ratio of world stocks fell to just under 9 percent from 18 only a year ago and investors are discounting a 45 percent decline in profits.