Bankers, politicians warn of worsening crisis

By Thomas Atkins and Clara Ferreira-Marques

DAVOS, Switzerland (Reuters) - World business leaders said on Saturday the worst might yet be to come in a financial crisis driven by continuing fears of bank losses and uncertainty over U.S. emergency stimulus measures.

"It's going to take some time for these things to work their way through the system," Citibank Chairman William Rhodes told Reuters in an interview. "In a nine-inning ballgame, I think we're in the fifth inning."

Bankers gathered in Davos hoped for the best but feared the worst in a week that saw the U.S. Federal Reserve make its biggest emergency interest rate cut in two decades.

Skies darkened further when French bank Societe Generale revealed $7 billion in losses resulting from the biggest trading scandal in history, spreading gloom around the annual meeting of the World Economic Forum in the Swiss resort.

Bankers listed their ills in public discussions but admitted in private hallway chats that there were few cures for a financial system faced with hundreds of billions of dollars in investments which have turned bad.

"It will be a while before you see a return of normalcy in banking and markets," Merrill Lynch CEO John Thain said.

Troubles in the U.S. housing market were likely to worsen this year, with interest rate cuts and a hefty fiscal stimulus package unlikely to offset downside pressures, he said.

Thain told Reuters he was not worried about further losses at his own bank, which reported $16 billion in mortgage-related writedowns and adjustment this month.

But in one of the most pessimistic public assessments of the short-term U.S. outlook from a senior banker, he told a panel discussion he saw more trouble ahead for the broader economy.

His comments were echoed by Japanese Prime Minister Yasuo Fukuda who said the world economy faced growing downside risks against a backdrop of the U.S. subprime problems and a record rise of oil prices.

"There is no need for excessive pessimism. At the same time however, we should respond quickly and should implement necessary measures," he said in Davos, adding that Group of Seven finance chiefs would discuss the credit turmoil when they meet in Tokyo next month.

Other senior bankers, speaking in Davos under the condition of anonymity, shared Thain's assessment, describing the international banking sector as gripped by uncertainty, fear and distrust that had crippled their ability to lend and threatened to choke off economic growth.

"As we look out into 2008, I think there will continue to be downward pressure on home prices, that will continue to put downward pressure on all mortgage-related securities," Thain said.

"The Fed (rate) cut and the fiscal stimulus package are not going to help declining house prices in the U.S.. That problem is likely to continue."

MORE LOSSES TO COME