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Politicians preach calm as fear, panic rule

PARIS/NEW YORK (Reuters) - Shares plummeted worldwide on Thursday, although U.S. stocks staged a late-session comeback, while politicians weighed in to calm financial markets swept by fears that years of runaway credit growth will end with a big blowout.

A man is seen through a glass reflecting stock market monitors as he stands outside a bank in Taipei, August 16, 2007. REUTERS/Nicky Loh

The largest U.S. mortgage lender, Countrywide Financial Corp., tapped out an $11.5 billion credit line, and another lender stopped funding home loans as companies scrambled for cash and credit markets seized up. At one point, Countrywide’s shares were down as much as 30 percent.

“It’s fear and panic,” said David Bianco, chief U.S. equity strategist at UBS in New York. “People are beginning to lean toward outlooks now of all the dominoes falling, that the U.S. economy slides into recession because of this credit crunch, and it has an adverse impact on the global economy and even the globally exposed sectors.”

A strong rally in the last few minutes of trading left the blue-chip Dow Jones industrial average down just 16 points, erasing an earlier drop of more than 340 points.

Financial stocks led the way on optimism that regulators may let the two biggest U.S. mortgage funding companies -- Fannie Mae and Freddie Mac -- play a bigger role in steadying the ailing housing industry.

First Magnus Financial Corp., the 16th-largest U.S. mortgage lender, said it stopped funding home loans and taking mortgage applications. It cited the “collapse” of the secondary market where lenders typically would try to resell mortgages to generate more cash for future lending.

National City Corp., a big Cleveland, Ohio-based bank, folded its home equity unit into its main mortgage unit to save money, resulting in job cuts.

French President Nicolas Sarkozy, on vacation in the United States, said the global economy is enjoying its best run of growth in decades and could withstand the market turmoil, though governments should remain on guard.

The White House declined to comment on the sharp moves in financial markets, and stuck to its view that the U.S. economy was fundamentally sound and should continue to grow.

A report from the Philadelphia Federal Reserve Bank that showed factory activity in the U.S. Mid-Atlantic region stagnated in August raised concerns about the health of the economy and pressured stocks.

GLOBAL SELL-OFF

Shares plunged in Asia and Europe, and more steeply in the emerging markets of Eastern Europe, South Africa and Latin America. Demand for the government bonds of wealthy countries rose at the expense of riskier debt and credit.

European shares suffered their biggest one-day fall in four years with the FTSEurofirst 300 stock index closing around 3.2 percent lower, at 1,443.89 points.

Britain’s Treasury said that economy was strong and well positioned to absorb market shocks.

“Fear of the unknown, i.e. credit quality, is starting to trigger panic and indiscriminate selling,” said Marco Annunziata, chief economist at UniCredit, a big European investment bank.

Annunziata called on the U.S. Federal Reserve, which has remained more hands-off than the European Central Bank, to play a more active role to restore order.

“All the markets are getting from the Fed is tough love -- a dangerous combination,” he said.

William Poole, president of the St. Louis Federal Reserve Bank, said on Wednesday that financial market turmoil had not undermined the U.S. economy and there was no need for the central bank to ride to the rescue with an emergency rate cut.

“It’s premature to say that this upset in the market is changing the course of the economy in any fundamental way,” he said in an interview with Bloomberg. “Obviously, there could be an impact, but we have to rely on some real evidence.”

The Fed did step in with another shot of liquidity on Thursday, adding $17 billion of reserves to the banking system, and said it stood ready to do more.

In Brussels, the European Commission said it would review the role of credit agencies that rate the collateralized debt obligations that have been at the center of the storm.

“We have to ask ourselves about the exact role that ratings agencies have played regarding this category of risk,” Sarkozy wrote in a letter to German Chancellor Angela Merkel, president of the G7 club of industrialized nations.

TOLL ON GROWTH

Swiss bank UBS said investors were more scared of risk than at any time since U.S. hedge fund LTCM collapsed in late 1998, according to the investment bank’s measure of sentiment.

Another gauge, spreads on U.S. two-year interest rate swaps, hit their highest since January 2001.

In the United States, Treasury Secretary Henry Paulson said the turmoil would exact a toll on U.S. growth but that the financial system and the economy were strong enough to withstand it without a recession.

Paulson told the Wall Street Journal in an interview published on Thursday that nothing should be done to protect market players against losses or restrain their risk-taking.

“One of the natural consequences of the excesses is that some entities will cease to exist,” he said.

Additional reporting by Kristina Cooke in New York, and Nick Edwards and Luke Baker in London

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