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World recession fears mount after finance crisis

BRUSSELS - Fears grew Wednesday that the financial crisis will mutate into a worldwide recession with leaders calling for new global action against a slowdown.

As EU leaders gathered for a summit devoted to the financial turmoil, a top US central bank official said the United States appeared to be already in recession.

Janet Yellen, president of the San Francisco Federal Reserve, said ‘virtually every major sector of the economy has been hit by the financial shock.’

She said recent data indicated there was ‘essentially no growth at all’ in the world's biggest economy and ‘growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely.’

Japan's Prime Minister Taro Aso has already said he has ‘huge fears’ for the future of the second biggest economy and German Chancellor Angela Merkel said the third economic giant faces a major test of its strength.

‘We must prepare ourselves for a weakening of growth in Germany. But I'm convinced that the slowdown will not prove a long-lasting one,’ Merkel said as she urged the German parliament to pass a 480-billion-euro (655-billion-dollar) bank rescue package.

‘Germany is strong. But Germany is going to go through a difficult period,’ she warned.

Merkel said the Group of Eight world industrial powers would hold a special summit on the crisis before the end of the year with leading developing nations also present.

In Brussels, British Prime Minister Gordon Brown urged fellow EU leaders to unite against the underlying problems behind the financial crisis.

The first phase of the crisis has been ended with the stabilisation of the financial system, Brown said. ‘I believe we must now move to stage two ... to make sure that problems that develop in financial systems, problems we know originated in America, do not occur again.’

Brown called for a complete overhaul of global financial regulations and institutions, such as the International Monetary Fund (IMF), as the world's economy was now far more interdependent than ever before.

‘It becomes obvious now that we are dealing with global financial markets... what we do not have is anything other than national or regional supervision,’ he said.

Governments announced more measures Wednesday to douse the financial storm.

· The European Commission proposed that minimum state guarantees on bank deposits should be lifted within one year to 100,000 euros (136,000 dollars) from 20,000 euros currently in a new bid to strengthen confidence.

· Greece announced government cash injections and loan guarantees of 28 billion euros (38.6 billion dollars) for banks.

· Spanish Prime Minister Jose Luis Rodriguez Zapatero said mergers are likely in the country's banking sector, which has so far escaped the worst of the crisis.

· Iceland's central bank cut its key interest rate by 3.5 percentage points to 12 percent in a move hurried forward because of the storm that has hit the country's banks and left the country fighting national bankruptcy.

European Union nations have already committed more than 1.8 trillion euros (2.4 billion dollars) to fighting the crisis by buying bank shares and providing loan guarantees to keep credit markets moving.

The United States has a 700 billion dollar rescue plan and the administration announced Tuesday that 250 billion dollars from that would be used to take stakes in nine major banks.

‘This is an essential short-term measure to ensure the viability of America's banking system,’ President George W. Bush said. Acknowledging misgivings over the move, Bush said the government intervention was ‘not intended to take over the free market, but to preserve it.’

Recession is typically defined as two consecutive quarters of negative growth. The US economy grew 2.8 percent in the second quarter, and third-quarter data are not expected until the end of October.

Worries about a worldwide slowdown and the crisis in the money markets have given global stock markets a battering this year. While there have been wild swings, all the main markets have suffered significant losses in 2008.

Share markets fell Wednesday though Tokyo was a bright spot, closing up 1.06 percent after Tuesday's record 14 percent surge. But Hong Kong closed down 5.0 percent and in midday trade, London slid 2.95 percent, Frankfurt lost 2.07 percent and Paris was down by 2.18.

‘After the early burst of euphoria on stock markets over the rescue packages launched worldwide... the dust slowly seems to be settling and the last few days' roller coaster is being followed by a kind of morning-after sentiment,’ said Commerzbank analyst Antje Praefcke.