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Recession tide rising as EU works on dam of state spending
2008-12-02
BRUSSELS (AFP) - The global economic crisis swept on to another watershed on Tuesday with EU ministers targeting a huge spending boost, stocks gyrating, the US in recession and central banks looking for new rescue routes. Renewed gloom about the depth and length of the downturn pulled the price of oil down to 46.60 dollars barrel in London, the lowest level for nearly four years. And the financial sector was again in the spotlight following a report that US banking icon Goldman Sachs will report a big loss. The ECB waded in by lending 340 billion euros (429.3 billion dollars) for a week to 787 banks at its benchmark lending rate of 3.25 percent. This was about 260 billion euros more than it had estimated the banks would need, having made similar generous amounts available a week ago. EU competition authorities, under fire notably from Sweden and Germany for tying up support for banks with red tape and unclear guidelines, said it would relax its conditions. "The new rules would permit state aid for risk capital and state guarantees, as well as subsidised loans for environmentally friendly products," Competition Commissioner Neelie Kroes said. And in the global auto industry, facing an epic challenge to produce "green" vehicles, attention was focused on US data for vehicle sales later in the day. These were expected to deepen the distress of US auto giants following weak European figures on Monday. On Tuesday a Swedish newspaper report said that the Swedish government had ruled out nationalising Volvo Cars if the US parent company Ford decided to sell. Analysts in London said sentiment had been hit by a press report that Goldman Sachs bank might report a quarterly loss of up to two billion dollars. "I have never before seen a financial system that has been in pain for so long," said Chuo Mitsui Trust Bank strategist Yosuke Hosokawa. "Markets are wondering whether the negative situation will deepen further." Finance ministers from all 27 European Union countries were meeting on EU proposals for a stimulus firewall totalling 200 billion euros, equivalent to 1.5 percent of EU gross domestic product. Luxembourg Finance Minister Jean-Claude Juncker insisted that the figure, disputed by eurozone ministers on Monday, was less important than that "everyone agrees with the general direction." But differences are evident. Germany is taking a more cautious line than for example France. Germany has criticised the commission for putting forward "populist" measures, and the Netherlands objects that countries with strong public finances should not be pushed to do more than those with big deficits. France has serious problems with its finances and has taken a lead in pressing for big EU-wide spending programmes. Meanwhile, global stock markets sent more distress signals after heavy losses on Monday. European shares opened with falls of about 1.5 percent but edged into slight gains by mid-day although the Frankfurt market spurted 1.36 percent. But sentiment was on edge after stocks in Tokyo fell 6.35 percent and in Hong Kong by 5.0 percent. The Sydney market fell by 4.2-percent despite an unexpectedly big cut by the Australian central bank in its key interest rate by one point to 4.25 percent. Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong, said: "The reason for the rebound in risk aversion was dismal data from across the globe." The stock market in Russia, where the economy is showing deep strain from the crisis, fell by more than 5.0 percent. A top US economic research body, the NBER, reported on Monday that the US economy has been in recession since December 2007. Augustine Faucher at Moody's Economy.com said his firm expected the downturn to last through the first half of 2009 and to be "the worst of the post-World War II era." The European Central Bank and Bank of England are expected to cut their key rates on Thursday because of a sharp drop in inflation, but top central bankers are looking increasingly for other tools to sustain credit and confidence. The Japanese central bank held its key rate at 0.3 percent but decided to widen its conditions for collateral, or guarantees and to offer unlimited cheap money to banks. The president of the US Federal Reserve central bank, Ben Bernanke, said that there was little room to cut the base US federal funds rate target from 1.0 percent. But the Fed could turn to other tools to inject cash to shore up the economy, although this might raise a risk of inflation eventually, he warned.
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