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Germany backs law on bank nationalizations

The German cabinet approved a law letting it nationalize banks, setting aside a reluctance to seize private property in the latest government intervention worldwide to tackle the financial crisis.

The bill could lead to the forced nationalization of struggling German lender Hypo Real Estate.

In setting aside a postwar commitment to respect private property, Germany became the latest government to edge away from free market policies, instead using state support to prop up flagging banks and industries.

President Barack Obama on Tuesday signed into law a $787 billion package of spending and tax cuts, the biggest initiative of its kind in US history. He said the stimulus package would “mark the beginning of the end” of the ills facing the economy.

But with new problems emerging all the time from a twin collapse in asset prices and availability of credit, financial markets remained jittery about the outlook.

“The problem is that we don't have any clear answers from the Obama government regarding the banking rescue package,” said Thierry Lacraz, strategist at Pictet in Geneva.

“Until we have more visibility on the US banks and more positive wording from companies, it's difficult to see markets climbing again.”

US automakers General Motors Corp and Chrysler LLC are also seeking almost $22 billion in extra government aid on top of the $17.4 billion already received.

But analysts say the US auto makers may not be able to return to profitability without first going through bankruptcy reorganization that would likely mean plant closures and tens of thousands of job losses.

If this were to happen, it would be a “messy and lengthy process which would further undermine confidence in the fragile economy,” said Michael Sheldon of Connecticut's RDM Financial.

GM said it could run out of cash as early as next month and its shares fell 12.8% on Tuesday. Chrysler said it sees the downturn in the US car market lasting another three years.

Governments worldwide are struggling to find their own solutions to the financial crisis, while trying to avoid accusations of protectionism and state intervention that could slow global trade or undermine confidence in their economies.

Germany's cabinet approved a draft law paving the way for the government to take control of Hypo Real Estate which has received billions of euros in state guarantees.

The law leaves open the possibility of an expropriation of Hypo's shareholders as a last resort.

Other countries, including Britain and Ireland, have already seized control of banks, justifying this by pointing to the nature of the crisis and the need to protect taxpayers.

But Germany has agonized over “Enteignung” (expropriation) of shareholders, a loaded term linked in the minds of many to Nazi seizures of Jewish property in the 1930s and East Germany's assault on private business after World War Two.

Government actions so far have failed to reassure financial markets. Global share prices, as measured by MSCI's world equity index, were down on Wednesday reflecting hefty falls in Asia overnight.

The euro edged up against the dollar after hitting a 2-1/2 month low on Tuesday on concerns about euro zone banks with heavy exposure to weakening economies in Central Europe.

Overall, investors were still heading into safe assets such as gold as worries spread the recession could drag down economies which had so far resisted the worst of the crisis.

In China - which many had hoped might be able to power the global economy out of the worst downturn since the Great Depression - a trade union official warned against "hostile forces" stirring up trouble amongst its newly employed workers.

Beijing's Communist Party leadership has said legions of idle rural workers gathered in the country's struggling export hubs could pose a threat to the stability.

About 20 million jobs have been lost in southern China's manufacturing hub of Guangdong alone.

Sun Chunlan, vice-chairman of the state-backed All-China Federation of Trade Unions, said police had been rushed to all regions to "understand the situation with regional social stability.

Beijing said it would increasingly use its $2 trillion in foreign exchange to support domestic growth and finance the expansion of Chinese companies overseas.

But it denied a magazine report quoting a senior official as saying its slowing economy meant the yuan might weaken to as low as 6.95 to 7 per dollar.

The news across Asia has been almost uniformly bad with Japan, the world's second-largest economy, reeling from its worst downturn in a generation.

In Taiwan, a source close to the government said GDP fell 8.36% in the fourth quarter of 2008.

The rare exception was in Australia where retail sales data showed a rise of 0.8% in the fourth quarter as shoppers took advantage of stimulus measures and falling interest rates. (Reuters)