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TOPWRAP 2-EU keeps lid on spending; US aids auto part makers
March 20, 2009 / 3:50 AM / 9 years ago

TOPWRAP 2-EU keeps lid on spending; US aids auto part makers

* EU resists US calls for more spending, pledges more for IMF

* Obama pledges $5 billion in aid to auto parts makers

* Dollar worst hit since 1985 by doubts over Fed action

* U.N. chief fears crisis sapping resolve on aid for poor (For more on the financial crisis, click [nCRISIS])

By Darren Ennis and David Lawder

BRUSSELS/WASHINGTON, March 20 (Reuters) - The European Union resisted pressure to pump more cash into its recession-hit economies just as Washington added $5 billion more to its soaring rescue bill, throwing a lifeline to stricken auto parts makers.

EU leaders are expected, however, to agree on Friday to contribute at least $75 billion to the International Monetary Fund to boost its firepower in the face of the worst financial crisis since the 1930s.

The IMF warned the world economy could shrink as much as 1 percent this year, in its first contraction since World War Two. It said more swift action to purge banks of toxic assets was necessary to make a gradual recovery next year possible. [ID:nN19469379]

The European leaders also backed a proposal to double to 50 billion euros ($67.5 billion) an EU crisis fund for eastern European nations outside the euro currency zone.

But they defended the stimulus packages they have already launched, despite calls led by Washington for Europe to spend more and after the Federal Reserve’s dramatic decision on Wednesday to pump a further $1 trillion into the limping economy.

“You can’t think you can solve everything with taxpayers’ money. Stimulus packages are already in place and taking us through this challenging time. We already have done a lot,” Swedish Prime Minister Fredrik Reinfeldt said at a summit of the 27-nation bloc.

On Thursday, the U.S. government promised $5 billion to auto parts suppliers crucial to the survival of U.S. car makers, in the latest effort to buttress an economy now in its 15th month of recession. [ID:nN19367617]

As rich countries dish out billions to save jobs and companies, U.N. chief Ban Ki-moon said he would appeal to world leaders at next month’s G20 financial summit to keep their pledges of aid to the poor, defenceless in the face of the crisis.

“As the situation is deteriorating ... I am concerned that this may inevitably affect the political will and available resources for the developing countries,” the U.N. secretary general told Reuters in an interview. [ID:nN19419247]

RECKLESS SPECULATION

U.S. President Barack Obama has pushed through a $787 billion stimulus package and his administration has given $17.4 billion to struggling car makers to prevent their collapse and save thousands of jobs, with jobless numbers already at record highs. [ID:nN19420406]

But public rage over $165 million in bonuses paid by insurer American International Group (AIG.N) after it was saved by a $180 billion bailout, continues to haunt Washington’s $700 billion financial industry rescue, seen as crucial for economic recovery.

To contain the outrage over what Obama described as a symptom of “a bubble and bust economy that valued reckless speculation over responsibility and hard work”, the House of Representatives slapped a heavy tax on the AIG bonuses to recoup most of the payments. [ID:nN19298368]

Lawmakers also suggested legislation that would ban bonus payments by all bailed-out companies until they fully repay public funds.

The aggressive move by the Fed to pump massive liquidity into the system, which initially lifted global markets, got mixed reviews once investors had more time to digest the possible implications.

The dollar was hardest hit, heading for its worst week in 24 years .DXY due to fears that by printing more money the Fed will create a glut of the world’s main reserve currency and stoke inflation in the future.

“This is a historic moment, the start of the debasement of the world’s reserve currency, and it feels to many participants that in the grand sweep of history we are witnessing the end of ‘Rome’ on the Potomac,” said Alan Ruskin, an RBS strategist.

Stock market sentiment also soured after an initial rally, reflecting worries that the Fed ventured into uncharted waters with its decision to buy $300 billion of U.S. Treasuries with little certainty whether the gambit will pay off.

With Tokyo closed for a holiday, Asia-Pacific stocks .MIAPJ0000PUS lost nearly 1 percent, tracking a similar fall in U.S. stocks .SPX overnight.

Shares looked set to fall in Europe, too, with financial spreadbetters predicting early falls of around 1 to 1.3 percent in the major indexes.

SEEKING UNITY

As leaders of the world’s top 20 economies prepare for a meeting in London on April 2 to forge a global economic action plan, the EU wants to present a united front there.

Many EU leaders favour tightening regulation over running up huge deficits in response to the crisis largely set off by excessive risk-taking by some of the world’s top financial institutions.

Some EU governments, however, face growing pressure to do more to defuse social unrest. French President Nicolas Sarkozy attended the summit on a day of mass protests over his handling of a crisis which could push Europe’s unemployment rate towards 10 percent this year. [ID:nLJ209953] (Reporting by Reuters bureau worldwide; Writing by Tomasz Janowski; Editing by Ian Geoghegan)

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