Bankers, politicians warn of worsening crisis

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.

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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.

Japan's Prime Minister Yasuo Fukuda appears on a video screen as he addresses a session at the World Economic Forum (WEF) in Davos January 26, 2008. REUTERS/Stefan Wermuth

“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.”


World Bank President Robert Zoellick said uncertainty pervaded the financial markets and that the impact on the global economy remained unclear.

“Some firms are going to have some big losses (and) I don’t think this has fully run its course,” Zoellick said in Davos.

Bert Heemskerk, chief executive of Dutch bank Rabobank, said European banks faced worse losses from the credit crisis.

“Quite a few banks are heavily involved, and in particular if you look at European banks, we have not seen the worst. The news has not been spreading out about the losses that the European banking system has to take,” Heemskerk said.

Thain, speaking on a panel with IMF Managing Director Dominique Strauss-Kahn and French Finance Minister Christine Lagarde, said he saw problems in credit markets spreading into the consumer sector, with capital markets not returning to past levels in the short term.

But he was more optimistic for the longer-term prospects of the banking sector, battered in recent months by tens of billions of dollars in writedowns that forced many of the big names to look abroad for liquidity.

Merrill announced last month that Singapore state investor Temasek Holdings had taken a $4.4 billion stake in the bank.

“What we have seen so far, as we have dealt with these problems, is that financial institutions have been very aggressive in realizing losses and recapitalizing,” he said.

“We have seen a great deal of interest on the part of those who have money around the world in investing in these financial institutions. That is a great vote of confidence in longer-term prospects for U.S. economy.”

For full coverage, blogs and TV from Davos, see: here

Editing by Sue Thomas