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EU backs IMF fund boost as economic gloom deepens

European Union finance ministers are set to back a call from the International Monetary Fund to double its funds to $500 billion to fight the global financial crisis, a document showed.

The move, outlined in a paper seen by Reuters, spells out the EU's position ahead of a G20 finance ministers meeting and comes as a key US policymaker said a coordinated global effort was needed to stimulate demand and drag the world out of recession.

Underlining the depth of the downturn, Japan posted its first current account deficit in 13 years as exports collapsed and reported a year-on-year rise in corporate bankruptcies.

“It is essential that the IMF has appropriate financial means to assist countries particularly affected by the current crisis,” said the EU draft document, to be approved by ministers of the 27-nation bloc on Tuesday.

G20 officials will on Friday and Saturday discuss how to deal with the global financial and economic crisis, which has made several European countries turn to the IMF for help.

The meeting is in preparation for a summit in London next month of the G20, which groups the world's richest nations and biggest emerging economies.

In an interview with the Financial Times, US President Barack Obama's National Economic Council director, Larry Summers, said kickstarting growth should take precedence over ironing out global imbalances.

“The right macro-economic focus for the G20 is on global demand and the world needs more global demand.”

“This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century. And this is one of those times,” Summers said.

Fears about the health of banks and car makers pushed Japan's Nikkei index to a 26-year closing low on Monday, while Hong Kong-listed shares of HSBC fell to a 13-year trough ahead of a deeply discounted rights issue this week.

Asian stock markets have held up better than others in the United States and Europe because governments and households in Asia are less burdened by debt, but analysts said the region was now paying the price for its dependence on exports.

“We don't believe Asia can outperform the G3 this year,” said Clive McDonnell, Asia strategist at BNP Paribas in Hong Kong, referring to Germany, Japan and the United States. “In the past few weeks, Asia has rolled over quite clearly.”

Unemployment in the United States rose to a 25-year high last month as firms axed workers in the face of a severe recession, but markets took some comfort from the fact that monthly job losses of 651,000 were not as high as some had feared.

“Ahead of the jobs report there had been rumors about a possible loss of 1 million jobs, but the result turned out to be basically in line with expectations,” said a trader at a Japanese trust bank.

The dollar dipped against the yen and euro as investors trimmed safe-haven buying of the US currency.

Japanese data revealed a record current account deficit in January, with the income surplus tumbling about a third from a year earlier, as the global recession crushed export demand and income from overseas investments.

The contraction in Japan's main export markets is pushing firms such as Toyota Motor Corp and Sony Corp deep into the red, prompting job and production cuts and setting the economy on course for its longest recession in modern times.

“We have seen the declines in exports, and now we see the income balance declining because the global financial crisis is cutting earnings on overseas investments,” said Akira Maekawa, senior economist at UBS.

“This is a bad development for an export-oriented economy.”

Japanese corporate bankruptcies rose 10.4% in February from a year earlier. It was the ninth straight month of year-on-year increases, although the total was lower than January's six-year high.

Much of the industrialized world, including the United States, Japan, the euro zone and Britain, are in the grip of a deep recession, and emerging economies are feeling the squeeze from plunging demand and frozen credit.

Britain's downturn will be deeper than previously thought, the British Chamber of Commerce said in a report on Monday that forecast an economic contraction of 2.8% this year.

The Bank of England has cut interest rates to a historic low of 0.5% and last week said it would begin “quantitative easing” - buying assets such as government bonds with newly created money - in an effort to kickstart growth.

Deputy Governor Charles Bean said Britain was in the early stages of a “particularly nasty recession” and the action was needed to shorten the downturn.

“We have the scope to do more if that proves necessary,” he wrote in an editorial in Monday's Daily Mail. (Reuters)