Iceland's central bank unexpectedly raised the benchmark interest rate by six percentage points to the highest level in at least seven years to boost the currency after reaching a loan agreement with the International Monetary Fund.
The rate was lifted to 18 percent, the Reykjavik-based bank said in a statement today, taking it to the highest since the bank began targeting inflation in 2001.
“Six percent isn't worth a lot if the currency drops another 15 percent,'' said Henrik Gullberg, a strategist at Deutsche Bank AG in London. “What we're seeing is a complete liquidation of everything in emerging markets, and Iceland, even in the emerging- market universe, is very vulnerable. The only thing that'll improve the krona is a return of risk appetite, and there are no signs of this happening any time soon.''
The central bank is raising rates as Iceland, the first western nation to seek financial help from the IMF since the U.K. in 1976, faces an economic contraction, coupled with possible hyperinflation and rising joblessness. The economy will shrink as much as 10 percent next year, the IMF forecasts. Iceland will receive about $2.1 billion from the Washington-based fund, according to a deal struck on Oct. 24.
“The interest-rate rise is a natural part of the IMF package but can't stand alone,'' said Lars Christensen, chief analyst at Danske Bank A/S, by telephone from Reykjavik. “There'll have to be fiscal tightening and stricter regulatory controls.'
Iceland's Talks
Iceland is in talks with the governments of Sweden, Norway and Denmark to secure as much as $4 billion in additional loans. The central bank has also sent requests for support to the European Central Bank and the Federal Reserve, Prime Minister Geir Haarde said at a Nordic government summit in Helsinki today.
The increase in the key rate comes after the central bank on Oct one hour cash. 15 cut it by 3.5 percentage points from 15.5 percent. That move indicated policy makers were focusing on growth and abandoning their target of stabilizing inflation, which may soar as high as 75 percent in coming months, according to Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen.
The IMF deal is due to be presented to the fund's executive board later this week. One of the conditions attached to the loan was that policy makers raise the key rate to 18 percent, the central bank said in a statement on its Web site today.
Central bank Governor David Oddsson told reporters today he hopes rates “don't stay at the current level for too long. This decision doesn't necessarily mean that we assume that rates will rise further.'' The bank holds its next rate setting meeting on Nov. 6.
Under Review
Still, the central bank will continue to “review the matter,'' he said. Policy makers target price gains of 2.5 percent. Inflation was 15.9 percent in October, Statistics Iceland said yesterday.
The central bank has been holding daily auctions since the currency's collapse earlier this month with local market makers setting the rate at about 150 kronur per euro. According to Roed- Frederiksen, further rate increases can't be ruled out if policy makers want to strengthen the krona once international traders are granted access to the market.
Iceland's financial regulator took control of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf earlier this month, after they couldn't secure short-term funding. That precipitated the collapse of the currency. The central bank on Oct. 7 attempted to peg the krona only to abandon the measure a day later citing “insufficient support.''
The Group of Seven warned the surging yen posed a threat to financial and economic stability on Monday in the latest coordinated effort by the world’s richest nations to contain worst financial crisis in 80 years.
The yen was the only currency mentioned in a brief G7 statement issued as it rallied to 13-year high against the dollar, threatening Japanese exports as world’s second-largest economy tumbles toward recession.
With Tokyo’s Nikkei share average hitting a 26-year low and share of Japan’s biggest banks tumbling on fears that they would have replenish capital, Finance Minister Shoichi Nakagawa said the G7 was worried about volatility in the yen.
“We continue to monitor markets closely and cooperate as appropriate,” Nakagawa said, reading from the G7 statement.
South Korea resorted to a record interest rate cut and Australia’s central bank said it had intervened to support its currency in another sign that policymakers are reaching beyond troubled banks now that the financial crisis has shattered investor confidence, and threatens jobs and corporate sales.
Japanese Prime Minister Taro Aso asked ministers to consider emergency measures to stabilize the stock market, including government purchases of shares and relaxing rules on recapitalization of banks. Three banks were looking to raise cash to offset stock market losses, Japanese media reported.
The Nikkei clawed 0.7 percent higher but Asia-Pacific shares outside of Japan fell 2.6 percent to a four-year low, according to an MSCI index. Safer assets such as government bonds and gold traded higher on the day, suggesting investors would need to see more than just rhetoric before acting.
“Whether what we’re seeing right now from policymakers is sufficient is difficult to tell faxless pay advances. The price action alone in markets tells me not,” said Dwyfor Evans, currency strategist with State Street Global Markets in Hong Kong.
Developing nations have been turning to the International Monetary Fund for help to stave off the worst global financial crisis since the Great Depression in the 1930s. Hungary had reached an agreement to get a “substantial financing package” in the next few days that will include financing by the European Union and some individual European governments, the IMF said.
The IMF agreed on a $16.5 billion loan package for Ukraine on Sunday.
STERNEST TEST
South Korean policymakers took their most dramatic measures yet in a months long battle to buttress confidence in an economy facing its sternest test since the Asian financial crisis a decade ago.
The Bank of Korea cut its main interest rate by 75 basis points to 4.25 percent in an unscheduled meeting. The rate cut was the biggest on record and only the second emergency move since the bank adopted its current monetary policy system; the first was after the September 11, 2001 attacks on the United States.
“Their priority is to minimize the impact of the crisis on growth and on volatility. Eventually this could also help the markets,” said Sebastien Barbe, senior economist and foreign exchange strategist with Calyon in Hong Kong.
President Lee Myung-bak pledged to increase government spending and to cut taxes to support Asia’s fourth largest economy, which grew at the slowest quarterly pace in four years during the last quarter.
The U.S. Treasury is considering taking stakes in insurers, as it prepares a new round of capital injections targeted at regional banks and other financial companies, a person briefed on the plan said.
A final decision hasn't been made on whether insurers will be included in the government's purchases of preferred equity, said the person, who spoke on the condition of anonymity. The Treasury, which had planned to announce investments in about 20 banks, reversed course and will let firms disclose their own share sales in coming days, the person said.
An initial $125 billion out of the $700 billion approved by Congress was allocated last week to buy shares of nine of the largest U.S. banks and another $125 billion was set aside for smaller lenders. Investments in insurance companies would widen the scope of Treasury Secretary Henry Paulson's Troubled Asset Relief Program as the credit crisis deepens.
“We had a problem that turned into a panic, and now the government is running around trying to put out the fires,'' said James Angel, a finance professor at Georgetown University in Washington. “If you need capital, it might be the only game in town.''
Paulson has shifted the financial rescue program to focus on equity purchases after markets deteriorated faster than policy makers anticipated. The strategy offers a quicker way to deploy taxpayer funds, Neel Kashkari, the Treasury official running the bailout plan, told lawmakers two days ago.
Insurers, Automakers
The Financial Services Roundtable, a trade association of the 100 largest banks, securities firms and insurers, pressed Treasury to broaden its guidelines so that insurance companies, broker-dealers, automobile companies and institutions controlled by foreign banks could also sell stakes to the government.
“The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market,'' wrote Steve Bartlett, the group's president, in a letter yesterday to Kashkari.
Separately, a group of insurance companies — mainly life insurers — asked the Treasury earlier this week if they would be eligible to participate in the program, said an industry official with knowledge of the discussion.
Some life insurers have asked the government to make the participation mandatory because firms don't want to identify themselves as needing funds, the person said.
PNC Acquisition
Among regional lenders, PNC Financial Services Group Inc. of Pittsburgh said yesterday it is buying Cleveland-based National City Corp. for about $5.2 billion in stock after getting a $7.7 billion infusion from the Treasury free credit report .com.
First Horizon National Corp., Tennessee's largest bank, said yesterday it obtained preliminary approval to receive about $866 million. The board of SunTrust Banks Inc., Georgia's largest lender, earlier this week authorized the sale of $1.6 billion to $4.9 billion in preferred shares to the Treasury.
The rescue law requires that Treasury's investments be publicly revealed within 48 hours. It isn't clear whether that means from the time the bank is approved or from when it receives the funds.
Under the Treasury's rules for the capital injection program, some U.S. insurance companies — those with a banking business — are eligible to request an equity investment from the TARP.
The Standard & Poor's 500 Insurance Index yesterday rose 2.31, or 1.7 percent, to 139.66. The broader S&P 500 Index fell 31.34, or 3.5 percent, to 876.77.
A number of insurance companies have been battered by the recent market downturn.
Market Slide
U.S. life insurance stocks have plunged about 45 percent in the past month on concern that losses on corporate debt and mortgage-backed securities will squeeze the firms' liquidity and force them to raise capital.
MetLife Inc., the biggest U.S. life insurer, raised about $2.3 billion this month in a stock offering, and Hartford Financial Services Group Inc. said it would raise $2.5 billion from Allianz SE.
The largest insurers in the U.S. and Bermuda posted more than $93 billion in writedowns and unrealized losses on holdings tied to the collapse of the U.S. subprime mortgage market since the beginning of last year. Insurers invest policyholder premiums in bonds before paying claims.
American International Group Inc., once the world's largest insurer, accounts for about $48 billion of the declines.
AIG, which posted three straight unprofitable quarters because of bad bets on the housing market, agreed last month to turn over an 80 percent stake to the U.S. in exchange for an $85 billion loan. The New York-based insurer subsequently tapped a second federal credit line and has borrowed $90.3 billion.
AIG may need more than the $122.8 billion available, Chief Executive Officer Edward Liddy said Oct. 22 on PBS's “The NewsHour With Jim Lehrer.''
Insurers including Allstate Corp., Prudential Financial Inc., Lincoln National Corp., MetLife and Travelers Cos. have suspended or scaled back share buybacks to shepherd capital as losses from fixed-income investments mount.
Sweden cut its key lending rate by a half-point for the second time in two weeks and forecast another similar reduction within six months to cushion the economic slowdown. It also lowered forecasts for growth and inflation.
The Riksbank cut the repo rate to 3.75 percent, according to a statement today on its Web site in Stockholm. The cut was forecast by two of 21 economists surveyed by Bloomberg. Twelve forecast a quarter-point cut and seven no change.
“The central bank is bracing itself for significantly worse economic development,'' said Cecilia Skingsley, an economist at Swedbank AB. The bank expects the global financial turmoil to have “large and serious consequences for the Swedish economy.''
The Riksbank, which raised rates as recently as last month, has switched direction after the financial turmoil damped demand for exports that make up half the economy. The bank has cut rates more than any other central bank in Europe outside Iceland, while the government has pledged 1.5 trillion kronor ($192 billion) to guarantee loans as part of a global effort to revive lending.
The Swedish krona was largely unchanged at 10.0615 against the euro by 1:56 p.m. in Stockholm. The yield on the 5.25 percent government bond due March 2011 fell 21 basis points to 2.97 percent. A basis point is 0.01 of a percentage point.
The krona has fallen 9 percent in the last year as demand for Sweden's exports slows and since investors pull money out of smaller, less liquid currencies.
“Our assessment is that the krona will strengthen again once conditions on the financial markets improve,'' First Deputy Governor Irma Rosenberg said.
Preventing a Slump
The Riksbank lowered its growth forecasts to 0.9 percent for this year and 0.2 percent for 2009, compared with September estimates of 1.1 percent and 0.9 percent respectively. The jobless rate will rise to 6.2 percent this year, 6.9 percent in 2009 and 7.6 percent in 2010 percent from 6.1 percent in 2007, it added.
“Demand in the global economy is falling with great force,'' Governor Stefan Ingves said at a press conference. “We forecast a 2009 with quite weak economic growth.''
As growth slows, headline inflation will ease to 1.6 percent next year from 3 percent in 2008. The bank had previously forecast prices would rise 3.9 percent in 2008 and 2.3 percent in 2009.
The scale of the global financial crisis may push rates lower than the central bank has estimate guaranteed cash advance.
“We think that the Riksbank will deliver a lot more than it forecasts,'' Nicola Mai, an economist at JP Morgan Chase Bank, said in a client note. “We expect a 25 basis point cut in December and another 100 basis points of easing next year.''
New Found Unity
Growth slowed to an annual 0.6 percent in the second quarter, matching the slowest pace in more than 11 years.
The Riksbank unanimously cut the key rate for the first time in more than three years on Oct. 8 as part of a coordinated effort with five other banks including the U.S. Federal Reserve and the European Central Bank. Board members had previously disagreed over the outlook for rates as opinions differed on growth and inflation prospects.
The Riksbank has made available 280 billion kronor of three- and six-month Swedish currency loans and 27 billion of U.S. dollar loans to banks to ease borrowing costs.
In addition to its loan guarantees, the government this week created a fund that may buy shares in banks. The National Debt Office has also issued about 100 billion kronor of treasury bills to meet demand for low-risk government paper.
“This is a very unusual situation when financial stability and monetary policy go hand in hand,'' said Ingves said.
Banks
While the U.S., the ECB and Sweden are cutting rates, emerging markets are under pressure to raise borrowing costs to halt a slump in their currencies. Hungary lifted its key rate by 3 percentage points to 11.5 percent yesterday, while Turkey kept its benchmark at 16.75 percent.
Swedish banks have managed to avoid the worst of the credit crisis, though SEB AB today reported a 51 percent slump in net income as loan losses jumped almost fourfold. The bank said it will now accelerate its cost-cutting program by lowering its employee base by 500 people, or 5 percent of its Swedish workforce.
Svenska Handelsbanken AB yesterday said third-quarter profit rose an unexpected 6.2 percent, driven by higher lending income from Sweden, Finland and the U.K. Nordea Bank AB, the Nordic region's largest lender, and Swedbank AB, the largest bank in the Baltics, both said today profit declined 14 percent because of higher loan losses and lower commission income.
The cost of borrowing in euros for three months fell to the lowest level since before Lehman Brothers Holdings Inc. collapsed as governments stepped up efforts to boost bank balance sheets and policy makers offered cash to revive lending.
The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 3 basis points to 4.96 percent today, the British Bankers' Association said. That's the lowest level since Sept. 12, the Friday before Lehman failed. The overnight dollar rate slid 23 basis points to 1.28 percent, below the Federal Reserve's target for the first time since Oct. 3.
“The initiatives that governments have taken are beginning to work,'' said Laurence Mutkin, the London-based head of European fixed-income strategy at Morgan Stanley. “We're seeing a lot of improvement.''
Governments worldwide have introduced measures to shore up bank balance sheets after money markets seized up following the Lehman bankruptcy on Sept. 15. The French government will inject 10.5 billion euros ($14 billion) into BNP Paribas SA, Societe Generale SA and four other domestic banks as they tap for the first time the 360 billion-euro rescue package unveiled this month.
Interbank rates have tumbled in the past week after policy makers in Europe offered lenders unlimited dollar funding. The European Central Bank and the Bank of England today made available as much U.S. currency as required. The ECB allotted $101.93 billion of 28-day cash at a fixed rate of 2.11 percent, while U.K. policy makers loaned $26 billion.
Libor-OIS
The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, was at 274 basis points, down from 290 basis points yesterday and 364 basis points on Oct. 10.
Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate during the life of the swap. For dollar swaps, the floating rate is the daily effective federal funds rate.
Treasury three-month bills fell for a fourth day, the longest sequence of declines in 10 weeks, as investor appetite for the safest assets dwindled on speculation concerted global action will ease the turmoil in the credit markets. The yield rose 14 basis points to 1.22 percent, the highest in about a month.
The three-month dollar Libor slid 23 basis points to 3.83 percent today. That's still 233 basis points more than the Fed's target rate for overnight loans of 1.5 percent, up from 120 basis points about a month ago. At the start of the year, the spread was 43 basis points. A basis point is 0.01 percentage point.
`Slight Improvement'
“We see a slight improvement on the interbank market, but no breakthrough yet,'' European Central Bank Executive Board member Juergen Stark said in an interview with German radio station Deutschlandfunk payday loan cash advance loan. “There's a high risk that we'll see another incident'' in the banking sector.
The Libor is used to determine rates on $360 trillion of financial products worldwide, from mortgages to company loans and derivatives.
Barclays Plc, the U.K.'s second-biggest bank, confirmed a report by Cazenove that the lender's ability to issue unsecured funding has improved since Oct. 8, when the government announced a rescue package for financial institutions.
Rates for one-month asset-backed commercial paper fell to the lowest level in a month today. Yields on the highest-rated ABCP placed by dealers and due in 30 days dropped 30 basis points, the fourth-straight decline, to 3.45 percent, the lowest since Sept. 22, according to data compiled by Bloomberg.
TED Spread
Commercial paper is used by companies to meet short-term financing requirements.
The Fed invoked emergency authority today to purchase assets from money-market mutual funds that are having difficulty meeting redemptions from their investors. The central bank will lend to a series of special units that will buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less.
“There's plenty of cash on the table and there's plenty of money coming into the banking sector,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking arm of Credit Agricole SA. “What we're finding is that confidence has been improving.''
The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was 261 basis points today, down from 298 basis points yesterday.
The demise of Lehman deepened a global credit crisis that froze the commercial paper and money markets, led to Goldman Sachs Group Inc. and Morgan Stanley turning themselves into commercial banks and sent the TED spread on Oct. 10 to 464 basis points, the highest level since Bloomberg began compiling the data in 1984.
The overnight Libor for dollars doubled to 6.44 percent on Sept. 16, a day after the Lehman bankruptcy filing, as banks balked at lending to each other on speculation more would fail.
In Asia, the three-month interbank lending rate for Hong Kong dollars, or Hibor, dropped for a third day, sliding 31 basis points to 3.35 percent, its longest run of declines in more than a month. Singapore's three-month rate for U.S. dollar loans slid for a sixth day, to 3.92 percent.
Internet advertising giant Google reported a strong increase in sales and a bigger profit than expected despite the current economic slump.
The Mountain View, Calif.-based company reported revenue of $5.54 billion in the quarter ended Sept. 30, an increase of 31% from $4.23 billion a year ago.
Excluding commissions paid to advertising partners, Google posted sales of $4.04 billion, roughly in line with the $4.06 billion in sales analysts polled by Thomson Reuters expected on this basis.
Google reported net income for the third quarter of $1.35 billion, up 26% from $1.07 billion a year ago. Excluding certain charges, such as the cost of employee stock options, the company earned $4.92 a share, better than consensus estimates of $4.75 per share.
"While we are realistic about the poor state of the global economy, we will continue to manage Google for the long term, driving improvements to search and ads, while also investing in future growth areas such as enterprise, mobile, and display," said Google chief executive Eric Schmidt in a statement.
Shares of Google (GOOG, Fortune 500) jumped more than 7% in after-hours trading.
But for the past three months, investors have been concerned about Google’s performance, since its business relies heavily on advertising.
Google’s shares have fallen more than 36% over that time period as investors worried that cash-strapped businesses simply might pull back on spending on search advertising.
However, the number of paid clicks registered by Google on its sites and through its AdSense advertising network grew 4% compared to the second quarter and rose 18% compared to the same period a year ago electronic check payday advance.
Tighter wallets may play to Google’s strengths and drive up web traffic however, according to Schmidt.
"As marketing budgets are squeezed, targeted measurable ads are becoming more valuable to advertisers, and as consumer budgets are squeezed, people use the web for comparison shopping to hunt for bargains online and in stores," he said in a conference call to analysts.
"The number of search queries is actually going up," said Jeffrey Lindsay, analyst with Sanford C. Bernstein & Co.
When economic times are tough, people don’t stop searching for things online, according to Lindsay; they just search for different things.
"Even if someone loses their job, they’re going to look on the Internet for a new job," he said.
Investors have also been frustrated by the fact that a potential ad-sharing deal with rival Yahoo! (YHOO, Fortune 500) has been put on hold due to scrutiny from antitrust regulators.
The deal would give Google a gigantic new ad partner and help it widen its lead over Microsoft (MSFT, Fortune 500), which tried unsuccessfully to buy Yahoo earlier this year, in the lucrative online advertising market. But the government is concerned that a Google-Yahoo alliance would produce an online advertising monopoly.
The Bush administration will invest about $125 billion in nine of the biggest U.S. banks, including Citigroup Inc. and Goldman Sachs Group Inc., in the government's latest attempt to shore up confidence in the financial system.
The proposed cash injections in exchange for preferred shares are part of a $700 billion rescue approved by Congress and follow similar moves by European leaders to unfreeze credit markets by helping beleaguered banks. The other companies are Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp., said people briefed on the plan.
“They've decided they need to do something drastic and this is drastic,'' said Gerard Cassidy, a bank analyst at RBC Capital Markets in Portland, Maine.
The purchases represent a new approach for Treasury Secretary Henry Paulson, who first promoted a bailout targeted at illiquid mortgage-related assets. The urgency for a more immediate infusion has grown as banks struggle to regain the confidence of investors, counterparties and clients after bad loans caused more than $635 billion of writedowns across the industry. Paulson will discuss his plan at a press conference at 8:30 a.m. today in Washington.
The prospect of government support sent stocks higher around the world. The Standard & Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance. Asian stocks also surged, with the Nikkei 225 Stock Average jumping 13.4 percent, the most ever.
`Big Wallop'
“The government has gone to Plan B and it packs a big wallop,'' said Frederic Dickson, who helps oversee $25 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each, people said.
The government will obtain its stakes with a type of security designed not to dilute the value of common shares.
None of the nine banks getting government money was given a choice about it, said people familiar with the plans. All of the banks involved will have to submit to compensation restrictions as mandated by Congress, people said.
`Healthy' Firms
Another $125 billion will be used to recapitalize other financial institutions around the country, the people said. Neel Kashkari, the U.S. Treasury official overseeing the rescue of the financial system, yesterday said the equity purchases will be aimed at “healthy'' firms best payday advance.
Under the plan to be announced today, the government will also guarantee for three years banks' newly issued senior unsecured debt, making it easier for them to refinance their liabilities, the people said.
Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair scheduled a press conference at 8:30 a.m. today in Washington. The U.S. initiative follows an announcement that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.
“Steps to restore confidence in our institutions and markets will go far toward resolving the current market stress,'' Bernanke wrote today in a column in the Wall Street Journal. “We will not stand down until we have achieved our goals of repairing and reforming our financial system, and thereby restoring prosperity to our economy.''
Bigger FDIC Role
Another part of the plan to be announced today would let the government expand FDIC coverage of non-interest bearing accounts, which are commonly business deposits.
Yesterday, Paulson summoned chief executive officers of the nine banks to the Treasury's headquarters in Washington to lay out the government's plans. The executives sat across the table with the heads of the Treasury, the Fed and other regulators.
After climbing for weeks, money-market rates in London yesterday fell after policy makers offered banks unlimited dollar funding and European governments pledged to take “all necessary steps'' to shore up confidence among lenders.
The London interbank offered rate, or Libor, for three- month dollar loans dropped 7 basis points to 4.75 percent, tied for the largest drop since March 17, the British Bankers' Association said.
Similar to Buffett
The government plan to buy preferred shares with warrants is similar to investments that Berkshire Hathaway Inc., the company run by billionaire Warren Buffett, made recently in Goldman and General Electric Co. Rather than buying common stock in the companies, which has declined in recent weeks, Buffett bought preferred stock paying a 10 percent dividend and received warrants that allow him to buy common stock at a pre-set price.
John Paulson, the founder of hedge fund Paulson & Co., wrote in a Sept. 26 editorial in the Wall Street Journal that the Treasury should adopt Buffett's approach rather than buying troubled assets.
Scott Talbott, chief lobbyist of the Financial Services Roundtable in Washington, which represents 100 of the biggest firms in the industry, said the group “is very supportive of using all these tools in varying degrees to help restore liquidity to the market.''
The International Monetary Fund warned on Saturday that debt-ridden banks were pushing the global financial system to the brink of meltdown and rich nations had so far failed to restore confidence.
The United States appealed for patience as world leaders raced to stabilize financial markets and avert the deepest global recession in decades, but the IMF said more steps would be needed in the coming months.
“Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,” IMF chief Dominique Strauss-Kahn said.
President George W. Bush huddled with Group of Seven economic chiefs and officials from the IMF and World Bank, and said top industrial nations grasped the gravity of the crisis and would work together to solve it.
“I’m confident that the world’s major economies can overcome the challenges we face,” Bush said, adding that Washington was working as fast as possible to implement a $700 billion financial bailout package approved a week ago.
“The benefits will not be realized overnight, but as these actions take effect, they will help restore stability to our markets and confidence to our financial institutions.”
Confidence has been in short supply and panic has swept through global markets, driving stocks to a five-year low on Friday and prompting banks to hoard cash. That has choked off lending to businesses and households, threatening to turn a global economic slowdown into a dangerously deep recession.
U.S. Treasury Secretary Henry Paulson said risks to the global economy were “the most serious and challenging in recent memory.”
Former U.S. Federal Reserve Chairman Alan Greenspan wrote in an article for Emerging Markets newspaper that the U.S. housing market will recover in the first half of 2009.
“The recent slowing in the rate of decline in U.S. home prices is the first positive note in this now yearlong trauma,'' Greenspan wrote in the article for Emerging Markets, a publication issued for this weekend's Group of Seven and International Monetary Fund meetings in Washington.
“More conclusive signs of pending home price stability are likely to become visible in the first half of 2009,'' he wrote.
The credit-market freeze will eventually thaw as “frightened investors take tentative steps towards reengagement with risk,'' the former Fed chairman said, without specifying a time frame instant cash advance. He praised the actions of governments in buying up toxic assets and recapitalizing banks.
Treasury Secretary Henry Paulson is pursuing a Congress- approved $700 billion rescue plan and the government may buy stakes in several banks within weeks. Iceland's government seized the island's top three banks this week after the banking system imploded. The U.K. government agreed to invest 50 billion pounds ($87 billion) Oct. 8 to boost capital in the nation's banks to unlock credit markets.
Ten years after Indonesia, South Korea and Thailand were bailed out by the International Monetary Fund, their stocks and currencies are again under siege. This time, analysts say, they are strong enough to stand alone.
The MSCI Asia Pacific Index fell 7.5 percent today for a 42 percent decline this year. Indonesia halted stock trading after the benchmark index tumbled 10 percent. South Korea's won slid 4.8 percent to the lowest since 1997, when the nation took out a $57 billion loan from the IMF to meet overseas debt payments.
“None of the economies are likely to experience the same kind of downturn to the same degree that you saw during the Asian crisis,'' said Duncan Wooldridge, a Hong Kong-based economist at UBS AG, citing the region's foreign-currency holdings and absence of “huge'' current-account deficits.
The Asian financial crisis, set off in 1997 by plunging currencies, forced government to raise interest rates to limit capital outflows and caused companies to buckle under billions of dollars of debt. The region has since accumulated more than $3 trillion of reserves, more than half of the global total.
Today's market rout wasn't confined to countries pummeled in 1997. Japan's Nikkei 225 Stock Average fell 9.4 percent, the sharpest drop in two decades. Australia's dollar declined 7.4 percent against the U.S. currency.
`Recession-Like' Growth
Asia faces “recession-like'' growth in 2009 because slumping stocks will depress business and consumer spending, already being hurt by a drop in exports to the U.S., Europe and Japan, Wooldridge said. UBS yesterday cut its growth forecast for Asia excluding Japan to 6.1 percent from 6.9 percent.
Indonesia's stock exchange halted trading for the first time in eight years after the benchmark index plunged 10 percent, the biggest decline since 1998.
“We need to give enough time to the market to digest information rationally,'' Ahmad Fuad Rahmany, chairman of Indonesia's capital market regulator, said in a mobile-phone text message. “It's justified for us to suspend'' trading if the index falls more than 20 percent in just three days, he said.
Indonesia's currency fell 1.4 percent against the dollar today, taking its drop this month to 4.1 percent.
The rush to sell stocks comes amid relatively buoyant economic growth. Indonesia's gross domestic product unexpectedly accelerated to 6.4 percent in the second quarter as rising prices and demand for the nation's coal, palm oil and rubber pushed exports to a record. Growth will probably cool as commodity prices recede.
`Nobody Is Immune'
“Indonesia is simply buffeted by external forces to which nobody is immune at a time when global liquidity is drying up and risk aversion is increasing,'' Agost Benard, associate director at Standard & Poor's in Singapore, said in an interview with Bloomberg Television yesterday (pay day loans).
In Thailand, the SET Index fell 6.9 percent to the lowest since 1993. The growth outlook in Asia's second-largest economy is worsening after protesters vowed to step up efforts to oust the government following violent clashes with police yesterday.
The Thai central bank kept interest rates at a 16-month high of 3.75 percent after two increases since July. The baht, Asia's third-worst performing currency this year, fell 0.2 percent to 34.54 per dollar at of 2:42 p.m. in Bangkok. The currency is close to its lowest level since February 2007.
Thailand's banks have enough capital to withstand the world credit crisis, said Vincent Milton, managing director of Fitch Ratings in Bangkok.
“You don't have the structural imbalances'' of 1997, Milton said. “The capital position of most Thai banks is stronger than lenders anywhere, because they are risk averse and moderate economic growth means there's been no run up on the loan books.''
Won's Slide
South Korea's currency slid to the lowest in a decade today as a seizure in global credit markets forced banks and companies to sell the currency to meet their dollar-financing requirements.
The slump has been exacerbated by a global shortage of dollars and by South Korea's current-account deficit, according to Goohoon Kwon, economist at Goldman Sachs Group Inc. in Seoul.
“Korea is the only major country in the region with a current-account deficit, so there's no money coming in,'' Kwon said. The shortfall stands at about 1.5 percent of gross domestic product, down from 3 percent during the financial crisis.
The deficit could change to a surplus “very quickly'' as the drop in oil prices shaves the import bill, Kwon said. A 10 percent decline in crude would lower the deficit, which was a record $4.7 billion in August, by about $1 billion a month, he said.
South Korea has said it is willing to use the nation's foreign-exchange reserves to ease the currency shortage. South Korea has accumulated $243.2 billion in foreign reserves. They plunged to $7.3 billion in November 1997 as the government made an unsuccessful attempt to prop up the won.
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