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Global finance could lose $2.8 trillion in crisis

TOKYO/LONDON - The global financial system could lose $2.8 trillion to the credit crisis, the Bank of England said on Tuesday, before an expected interest rate cut in the United States that others are poised to match.

Governments have agreed to inject around $4 trillion into banks and markets to contain the worst financial crisis in 80 years, which has forced stock markets to tumble and banks out of business, hastening a recession in much of the world.

Japan restricted investor bets on falling share prices with immediate effect to try to end a stock market slide, which has particularly hit its banking sector, and tried to talk down a rallying yen that threatens to deepen its economic downturn.

European shares gained 0.9 percent and Japan's Nikkei climbed 6.4 percent after hitting lows not seen in 26 years.

Prime Minister Taro Aso delayed a parliamentary election to take steps to concentrate on protecting Japan, the world's second biggest economy, from global recession.

The Bank of England (BoE) said the work so far in containing the crisis should calm the banking system but was cautious about the impact on the wider economy. It projected losses globally at $2.8 trillion.

"The instability of the global financial system in recent weeks has been the most severe in living memory," said Deputy Governor John Gieve. "And with a global economic downturn under way, the financial system remains under strain."

The BoE is expected to cut interest rates next week, a move the European Central Bank and the U.S. Federal Reserve are also expected to take to try to encourage more spending in economies increasingly fearful of a long, deep recession.

The consensus among Fed watchers is for a half-point cut in overnight rates to 1 percent, the lowest level since June 2004. It has already cut the benchmark federal funds rate to 1.5 percent from 5.25 percent over the past 13 months.

It will announce its decision on Wednesday. The ECB and Bank of England are expected to cut rates on Thursday next week.

Companies Seek Aid

Faced with a funding squeeze and a sharp economic downturn across much of the industrialised world, major companies joined banks in the queue for government aid.

U.S. automakers General Motors and Chrysler sought government cash for a merger, South Korean banks tapped a Federal Reserve funding window, Russia was in talks with China for export-backed loans for its companies and Kazakhstan pumped $5 billion into its banks.

The Japanese banking system, which largely escaped the fallout from U.S. mortgage defaults last year, had invested in the stock market and the three largest lenders are looking to replenish capital lost on the bourse.

Tokyo banned naked short selling, bringing the move forward by one week. Naked short selling allows traders to effectively sell stocks they do not own and without borrowing them first in the hope they will profit by buying stocks back at a lower price.

"Similar restrictions have already been put in place in the United States and Europe but Japan has lagged behind," Finance Minister Shoichi Nakagawa said. "I found a lag of a few days is critical for the Tokyo stock market."

The yen pulled away from a 13-year high against the dollar due to growing caution about the possibility of official intervention.

The yen has leapt about 20 percent on a trade-weighted basis this month alone and has compounded fears among Japan's exporters as their key markets lurch toward recession.

"The yen's rise in the past week is astonishing, but it does not reflect Japan's economic fundamentals," Japanese Economics Minister Kaoru Yosano told a news conference.

The Group of Seven finance ministers and central bank governors singled out the yen on Monday in a rare statement that said its rally threatened stability.

Automakers Suffer

With the yen trading at around 94 per dollar, Carlos Ghosn, chief executive of Nissan Motor Co and Renault, said it would be difficult for Nissan to compete, especially with U.S. car sales plunging 26 percent in September from a year earlier.

"Nobody reasonable is going to tell you that next year we're going to be out (of this crisis)," he said.

U.S. automakers are faring much worse than their Japanese rivals and two of America's "Big Three" are planning a merger to survive the crisis.

General Motors Corp and Chrysler LLC's owner, Cerberus Capital Management, asked the U.S. government for a $10 billion rescue package to support the merger, sources familiar with the talks said on Monday.

The U.S. government cobbled together a $700 billion plan to bailout Wall Street last month, after mortgage defaults and credit writedowns wrecked lenders and insurers.

Sixteen banks have accepted more than $33 billion of U.S. government cash, part of a $250 billion recapitalisation programme launched this month.

Two South Korea banks joined the queue for U.S. government dollars on Tuesday as the country grappled with an acute dollar funding squeeze and a crisis of investor confidence.