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Bank of America credit losses spiral

BERLIN/NEW YORK (Reuters) - Soaring profits at Bank of America masked deeper credit problems on Monday and Germany’s central bank said recession there worsened in the first quarter.

Bank of America’s shares tumbled after it reported a big increase in troubled loans, even though its purchase of Merrill Lynch helped first-quarter profit more than double.

The bank, which has been bailed out with $45 billion (30.8 billion pounds) of U.S. public money, said it had set aside $13.38 billion for credit losses, up from the fourth quarter’s $8.54 billion.

“We continue to face extremely difficult challenges, primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment,” Chief Executive Kenneth Lewis said.

The Bundesbank, which said Germany’s recession had “intensified further” from a 2.1 percent contraction in the last three months of last year, did not counter a growing financial market view that late 2008 and early 2009 could mark the low point for the worst global downturn in 80 years.

That belief has propelled world stocks on a six-week rally, but most experts expect no real upturn until next year.

“If we are to see a sustained bout of buying, we need to see consistent positive economic newsflow, which simply can’t be guaranteed,” said Chris Hossain, senior sales manager at ODL Securities.

“Having endured 18 months of pain, it will take more than some okay banking numbers to get the masses to return to the markets.”

CAUTION

Policymakers strove to temper optimism the world economy has turned a corner.

Trillions of dollars committed to stimulus packages are starting to work but governments may have to do more to pull the world economy round, the head of the OECD said in Beijing.

Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development told Reuters the world economy would not bottom out until next year and would probably only start growing again towards the end of 2010.

President Barack Obama said the U.S. economy remained under stress.

“We’re not out of the woods. This is still a difficult time for the economy. Credit is still contracted,” Obama said on Sunday while attending the Fifth Summit of the Americas in Port of Spain, Trinidad and Tobago.

European Central Bank Jean-Claude Trichet struck a similar note, saying it was dangerous to read too much into recent data that raised hopes the global economy may already have bottomed.

“With respect to 2009, let’s be prepared for having a very difficult year,” Trichet told Japanese newspaper Mainichi.

“In the course of the year, you have ups and downs: a mixture of better indicators and worse ones. Therefore, I would not overemphasise whatever we are observing.”

Bank of Japan Governor Masaaki Shirakawa told a gathering of Japanese trust banks financial conditions remained severe.

“The number of companies that say funding and the lending attitude of financial institutions are severe is increasing. Against this backdrop, Japan’s economy is deteriorating substantially,” Shirakawa said.

GREEN SHOOTS

Cautious optimism about corporate earnings and data suggesting the free-fall in global trade and economic activity was slowing has spurred talk of “green shoots” of recovery and buoyed world stocks by nearly a third since early March.

The latest of those signs came on Monday in a survey showing capital spending by U.S. firms improving, while the pace of lay-offs was slowing slightly.

Asian stocks held near a six-month high struck last week on Monday but European shares dropped nearly two percent and U.S. stock futures fell after Bank of America’s results.

The OECD’s Gurria said the jury was still out on whether stimulus measures adopted so far by Washington, Beijing and many other governments around the world were sufficient.

“We’ll have to see. But we have to be ready that if they’re not, we just go ahead and make extra efforts,” he said.

The International Monetary Fund, which starts its spring meeting in Washington on Saturday, is expected to renew its plea to keep the fiscal taps wide open well into 2010.

IMF Managing Director Dominique Strauss-Kahn was quoted on Sunday as saying the IMF would cut its global economic forecasts in the coming week and that he expected a recovery to start in the first half of next year.

In its most recent forecast, the IMF said the world economy would shrink in 2009 by between 0.5 percent and 1.0 percent, the largest contraction since the Great Depression.

Writing by Mike Peacock; Editing by Victoria Main

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