• Home
• /
• Business

All eyes on G7 as markets take fright

LONDON/HONG KONG - 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 U.S. government is weighing guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits, The Wall Street Journal reported.

European shares traded down nine percent within minutes of the opening, having already lost more than 15 percent in the four days to Thursday's close.

Japan's Nikkei tumbled nearly 10 percent, 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 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 U.S. Treasury plans to start injecting capital in U.S. 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 U.S. government as the lender and investor of last resort.

U.S. 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.

Elsewhere, South Korea's finance minister Kang Man-soo planned to plead with U.S. bankers for extended credit lines to save the country's banks from the ravages of the global crisis, while the won currency swung wildly for a second day.

Singapore said its export-dependent economy had sunk into its first recession in six years, and eased monetary policy. Neighboring Indonesia kept its stock market closed for a third day.

India injected more money into the banking system.

MARKET MELTDOWN

At the center of a financial crisis, credit markets remain in deep distress. With banks desperate to protect capital, the interbank cost of borrowing dollars rocketed. Three-month interbank rates for dollar loans have hit their highest level of the year.

Stock markets, meanwhile, have been among the most obvious victims of the crisis.

U.S. stocks slumped more than 7 percent on Thursday and 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 U.S. equities available.

MSCI's main world stock index, a benchmark for many global investors, is down more than 40 percent for the year to date, easily its worst loss in the 20 years the index

has been in its current form

The emerging market counterpart has more than halved this year.

"This is panic," said Takashi Ushio, head of investment strategy at Marusan Securities in Tokyo, said of Friday's Asian losses.

These kinds of falls may soon mean more than simply investor losses.

"(Share prices) have fallen to the level where they can hurt firms' funding," Japanese Prime Minister Taro Aso told reporters.