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Bickering clouds rescue efforts in financial crisis
2008-10-09
With financial markets seeing fresh panic, US authorities raised the prospect Thursday of direct capital injections into troubled banks, and Europe's central bank opened up an unlimited cash lifeline. But finance officials from around the world were bickering ahead of a key gathering in Washington, and the International Monetary Fund (IMF) called for more coordination instead of unilateral action. Stocks went into a new tailspin as panic took hold again on Wall Street, sending US indexes to fresh five-year lows. Some said short-sellers came back in force as regulators lifted a ban on the practice of betting on falling shares. The White House meanwhile denied reports that President George W. Bush had called a Group of Eight summit on the global financial crisis, and Britain blasted Iceland for freezing bank accounts. Also in Washington, officials said they were considering following Britain's move to inject capital in banks through special shares, in an effort to unclog credit markets. "These capital injections are something that (Treasury) Secretary (Henry) Paulson is actively considering," White House spokeswoman Dana Perino said ahead of a gathering of finance chiefs from the Group of Seven nations. Paulson had indicated this is one option authorized by emergency legislation giving the administration 700 billion dollars to buy up distressed assets from a real estate meltdown. German Chancellor Angela Merkel said in Berlin she could not rule out nationalizing any of the country's banks, following similar moves in other European countries such as Britain. In Frankfurt, the European Central Bank opened up an unlimited cash lifeline for credit-starved institutions at least until late January as it steps up the fight against a credit crunch. The ECB will "satisfy all demand of counterparties," it said in a statement which declared that the weapon will be available "for as long as needed," and at least until January 20, 2009. In another moved aimed at unblocking credit, the ECB pumped 100 billion dollars (74 billion euros) into markets in one-day loans, doubling the amount offered just two days earlier. Bank of America economist Gilles Moec said: "The ECB has just taken decisive steps to unclog the interbank market." But the financial crisis claimed new victims with Iceland's biggest bank, Kaupthing, nationalized. The move completed a state takeover of the country's top three banks as it battles national bankruptcy. Iceland's banks have huge international influence and the troubles of Kaupthing, Landsbanki and Glitnir have left fallout across Europe, particularly in Britain where there are major Icelandic investments. The Reykjavik stock market was completely closed Thursday because of the turbulence. British Prime Minister Gordon Brown condemned the "effectively illegal action" by Iceland. The BBC reported that the amount invested by almost 100 British local authorities in Icelandic banks is more than 720 million pounds (908 million euros, 1.2 billion dollars). The Dutch government said it will make available 20 billion euros to protect the financial sector against shocks from the world economic crisis and pledged to cover losses from depositors in Iceland's bank Icesave. Belgium, France and Luxembourg came to the rescue of struggling Dexia bank for the second time in less than two weeks, pledging to guarantee money it borrows on markets. After nationalizing the group, the three governments offered the guarantee to avert a cash crisis at Dexia as lending between banks has come to a standstill. The head of the IMF, Dominique Strauss-Kahn, said European Union countries should work together and avoid unilateral steps to fight a global financial crisis. "Cooperation and coordination in actions is the price of success. All kinds of cooperation have to be recommended," the former French finance minister said in Washington ahead of an IMF gathering. Unilateral action "has to be avoided, if not condemned," Strauss-Kahn said. Share markets saw brutal selling pressure after some early calm. US shares opened higher but quickly faded. The Dow Jones Industrial Average plunged 678.91 points (7.33 percent) to end at 8,579.19, the seventh straight loss for the Wall Street index and the first close below 9,000 since 2003. The Nasdaq slumped 5.47 percent and the Standard & Poor's 500 index retreated 7.62 percent. The market was gripped by panic in a late selloff that accelerated with traders uneasy about global efforts to battle a credit crunch that has led to a financial firestorm. "Continued nervousness about the economy and the inability of the Fed and the Treasury to break the logjam in the credit markets is pumping up the pessimism," said analysts at Charles Schwab & Co. "This cascading waterfall selloff is ugly," said Barry Ritholtz at Ritholtz Research. Ritholtz said some of the jitters may be linked to a big settlement date for contracts from Lehman Brothers, the Wall Street giant that went bankrupt last month, with considerable confusion on how the market would price the assets. Analysts at Bespoke Investment Group noted that US regulators as of Thursday had lifted a temporary ban on "short" sales that allow investors to bet on declining share prices. A European rally wilted just before the close of trade. The London FTSE 100 index of leading shares fell 1.21 percent. The Paris CAC 40 shed 1.55 percent and the Frankfurt Dax lost 2.53 percent. In one bright spot, Russia's leading stock markets closed 10 percent higher, rebounding from record losses earlier this week. The two main Russian stock indices have plummeted by more than 60 percent since reaching record highs in May.
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