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All eyes on G7 as markets take fright

  The world’s economic powers faced huge pressure on Friday to contain the financial crisis as panic selling swept through European and Asian markets amid growing fears of a global economic recession.

 

With financial policy makers from the Group of Seven (G7) major industrial nations due to meet later in Washington, bank bailouts, liquidity injections and coordinated interest rate cuts across the world have failed to quell investor fears. In a bid to unfreeze bank lending and staunch massive losses in equity markets, the US government is weighing guaranteeing billions of dollars in bank debt and temporarily insuring all US bank deposits, The Wall Street Journal reported.

European shares traded down nine percent within minutes of the opening, having already lost more than 15% in the four days to Thursday’s close. Japan’s Nikkei tumbled nearly 10%, registering its biggest one-day drop since a 1987 crash and losing nearly a quarter of its value in a week. The global crisis also claimed its first Japanese financial institution -- unlisted Yamato Life Insurance Co., which had $2.7 billion (1.6 billion pound) debts and the government looked to prop up smaller banks.

Focus was on the G7 meeting, which is under increasing pressure to come up with something new to save the global financial system. “Politicians must be scared by now, looking at stock markets and the problems in the credit markets,” said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd in Hong Kong. “Much more needs to be done,” he said.

The US Treasury plans to start injecting capital in US banks as soon as this month, according to a financial policy source familiar with Treasury Secretary Henry Paulson’s thinking. That partial nationalization of American banks would represent an enlarged role for the US government as the lender and investor of last resort. US policy had focused on a plan to buy banks’ distressed assets, but many analysts say a move to shore up banks’ capital would be a more direct way to break a logjam in credit markets that has shut down new borrowing for consumers and businesses.

 

BRITISH EXAMPLE

British Prime Minister Gordon Brown called for a global solution to the crisis and urged other countries to adopt Britain’s actions to save the banking system. Other governments should follow Britain in putting money into struggling banks and offering guarantees worth hundreds of billions to persuade banks to start lending to each other, Brown wrote in an article in The Times newspaper. “Because this is a global problem, it requires a global solution,” he wrote.

Late on Thursday, the International Monetary Fund said it was ready to lend to countries hit by the global credit crunch and had activated an emergency financing mechanism first used in the 1990s Asian crisis. US stocks have now lost $2.3 trillion this week and $8.3 trillion over the past year, according to the Dow Jones Wilshire 500, the broadest measure of US equities available.

In Japan, escalating bankruptcies in the property sector and among small businesses, along with fears of a global recession, have dragged the country’s export-dependent economy into crisis. The government said it may revive a bank rescue law from a 1990s crisis, with one report suggesting Tokyo may set up a $100 billion fund to prop up smaller lenders. “(Share prices) have fallen to the level where they can hurt firms’ funding. So I have instructed the ruling coalition to come up with steps,” Japanese Prime Minister Taro Aso told reporters.

Government ministers and analysts were quick to play down the risk of contagion from the failure of Yamato Life Insurance. But trust in the financial system was in short supply. “This is panic,” said Takashi Ushio, head of investment strategy at Marusan Securities in Tokyo. “Paulson will have to definitely promise the injection of public funds, and then he’ll have to make the timing of this very clear.” The punishing decline in global stock markets has added to pressure on policy makers to do more to stem the crisis -- even after approval of a $700 billion US bailout fund.

This week, central banks from Europe and the United States to China, South Korea and Taiwan chipped in to help by slashing interest rates, as fears of inflation recede into worries about economic growth.

On Friday, India’s central bank also said it would ease monetary policy by cutting bank’s cash reserve requirement to 7.5% from 9.0% -- to release about $12.2 billion into the banking system. The emerging market counterpart has more than halved this year. (Reuters)