BEIJING/LONDON (Reuters) - Asian and European leaders closed ranks on Saturday to try to bolster confidence among investors who fear that a global credit crunch has ushered in a deep and damaging world recession.
The worst financial crisis in 80 years has forced countries to work together to find ways to help shore up a financial system crippled by banks fearful of lending to each other.
But with evidence mounting that Europe is already in recession, analysts fear that cooperation in shoring up banking systems could be threatened as governments begin to turn their attention to reviving domestic demand.
“We must use every means to prevent the financial crisis impacting growth of the real economy,” Chinese Prime Minister Wen Jiabao said at the end of a two-day summit of 43 Asian and European leaders in Beijing.
Governments have pledged around $4 trillion to support banks and restart money markets to try to stem the crisis and are considering tougher financial rules to guard against any repeat.
Wen said countries needed to strike a balance between innovation and regulation and between savings and consumption.
“We need financial innovation, but we need financial oversight even more,” he said, adding that China’s priority was to spur domestic demand to ensure the country maintained fairly fast, steady growth.
U.S. President George W. Bush, who will host a global summit on the financial crisis next month, said in a radio address on Saturday: “While the specific solutions pursued by every country may not be the same, agreeing on a common set of principles will be an essential step toward preventing similar crises in the future.”
In the Gulf, finance ministers and central bank governors said at a meeting on coordinating policy that they would look at directing more government funds into banks and regional stock markets, Al-Arabiya television reported.
Saudi Arabia, the United Arab Emirates and four other Gulf states have so far adopted separate responses to ease the pressures of the liquidity crunch on their banking sectors.
Qatar’s finance minister, Youssef Kamal, said the crisis would give impetus to create regional monetary union and he was sure the measures taken to protect the economies were sufficient.
Any significant redirection of Gulf investment to domestic markets could be a concern for banks and other firms in the West which have eyed the huge sums in the region’s state-run sovereign wealth funds as a potential source of capital while European and U.S. credit and share markets are seized up.
But the scarcity of private sector capital is being felt in the Gulf. Officials were set to discuss the risk of investments from countries hit by the crisis being “liquidated.”
Saudi Arabian stocks plummeted 8.7 percent on fears of an oil price fall and recession.
It followed a sell-off in stocks from Tokyo to New York on Friday after private sector activity in the euro zone’s economy contracted at the fastest pace in at least a decade and data showed Britain’s economy shrank 0.5 percent in the third quarter -- much worse than economists expected.
“The danger of a collapse (on financial markets) is far from over. Any all-clear would be wrong,” German Finance Minister Peer Steinbrueck said in an interview released on Saturday. “We are still in a dangerous situation,” he told Bild am Sonntag newspaper.
French Economy Minister Christine Lagarde, asked in a TV interview how long the crisis would last, replied: “I think that 2009 will not be a good year.”
Volatility has surged across financial markets and was particularly violent in foreign exchange trading on Friday, with a swathe of major and emerging market currencies sold aggressively in favor of the U.S. dollar and the Japanese yen.
Russian officials pledged on Saturday to prevent sharp fluctuations in the rouble, but said there was no need to limit capital movements or change the trading corridor of the currency, which hit two-year lows versus the dollar this week.
Russia runs a managed float of the rouble against a currency basket and the central bank has spent billions of dollars of its reserves -- the third largest in the world -- to keep the rouble’s rate within a fixed corridor.
“Just because the global financial crisis has hit our shores does not mean that the rouble has to be significantly devalued,” Alexei Ulyukaev, the first deputy chairman of the central bank, said in comments broadcast on Ekho Moskvy radio.
Emerging economies have been particularly hard hit by the crisis, forcing many to plunder their foreign exchange reserves to defend their currencies and financial systems.
Officials in Washington said those economies that qualify for a proposed new liquidity fund at the International Monetary Fund could be eligible for an unusually high level of funding.
Across Europe, banks have turned to government funds to ensure they could operate.
Belgian banking and insurance group KBC is seeking 3.5 billion euros from the government to boost capital, Le Soir daily reported.
In the United States, PNC Financial Services Group Inc agreed to purchase ailing Ohio-based National City Corp in a government-supported $5.6 billion deal that will create the No. 5 U.S. bank by deposits.
PNC was one of four regional banks that said they would receive cash infusions under a $250 billion bank recapitalization program, part of the U.S. Treasury’s wider $700 billion financial services rescue package.
The Treasury, which has already committed half that sum to nine of the largest U.S. banks, was studying how it could give relief to bond and mortgage insurance firms under the program, two sources familiar with the deliberations said.
Examiners with the Federal Reserve have questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel Investment Group, the Wall Street Journal reported on Saturday.
Citadel, one of the world’s largest hedge funds, is seeking to stop rumors it was liquidating some portfolios after its two main funds had lost 35 percent since January.
Reporting by Reuters bureaus worldwide; Editing by Mohammad Zargham