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Scramble to Save Banks as IMF Warns of Meltdown - ASHARQ AL-AWSAT English Archive
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WASHINGTON/CANBERRA (Reuters) – Rich nations rushed to shore up the global financial system after the International Monetary Fund warned of meltdown, with Australia and New Zealand guaranteeing bank deposits and newspapers reporting plans for Britain’s biggest retail bank rescue.

The International Monetary Fund said it backed a Group of Seven plan to try to stabilize markets and urged “exceptional vigilance, coordination and readiness to take bold action” to contain a firestorm that pushed global stocks to five-year lows.

Under the Australian plan, all deposits in the country’s banks, building societies and credit unions, would be guaranteed by the Australian government for the next three years, Australian Prime Minister Kevin Rudd told reporters.

The government would also guarantee term wholesale funding to local banks until global financial markets stabilized.

In the UK, the Sunday Times newspaper said Britain will launch its biggest retail bank rescue on Monday when the four largest, HBOS, Royal Bank of Scotland, Lloyds TSB and Barclays, ask for a combined 35 billion pound ($60.5 billion) lifeline.

France promised that a meeting of European leaders in Paris on Sunday will detail measures to keep a market panic from triggering the most severe global downturn in decades.

French President Nicolas Sarkozy and German Chancellor Angela Merkel, meeting in France, said they had “prepared a certain number of decisions” to present at the European summit to try to restore normal flows in blocked credit markets.

France’s Economy Minister, Christine Lagarde, said just before leaving Washington that the Sunday gathering would go beyond talking about remedies to “put meat, muscles on the bones of that skeleton and to develop, follow up and execute upon it.”

The United States appealed for patience but the IMF said time was short after the Group of Seven industrialized nations failed to agree on concrete measures to end the crisis at a meeting on Friday.

“Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,” IMF chief Dominique Strauss-Kahn said.

Strauss-Kahn later expressed hope government actions will prove powerful enough to persuade banks to resume lending and bring an end to a spreading credit crunch.

BATTERED MARKETS

President George W. Bush met with G7 economic chiefs and officials from the IMF and World Bank and said top industrial nations would work together to solve the crisis.

“I’m confident that the world’s major economies can overcome the challenges we face,” Bush said, adding that Washington was working as fast as possible to implement a $700 billion financial bailout package approved a week ago.

Last week, the Standard & Poor’s 500 index tumbled more than 18 percent –its worst week on record –while European stocks plunged 22 percent and Tokyo’s Nikkei crashed 24 percent on the week.

Japanese markets are closed for holidays on Monday, as is the U.S. Treasury bond market.

Last week’s coordinated interest-rate cuts from global central banks failed to sooth investors’ nerves and credit markets remained logjammed.

The G7 — the United States, Britain, France, Germany, Italy, Japan and Canada — met on Friday and then joined key emerging-market nations for a meeting of the Group of 20 on Saturday. Emerging economies including China, Brazil, India and South Africa now are feeling the impact of the market slump.

In an interview with the Observer newspaper, British Prime Minister Gordon Brown said he will try to broker a Europe-wide bail-out of banks modeled on Britain’s intervention, warning that the “stakes could not be higher” for jobs, mortgages and the future of the economy, the paper said on Sunday.

On Saturday, media reports said Germany was readying a rescue package that could be worth up to $549 billion, including the injection of equity capital worth “double digit” billions into its banks and guarantees for interbank lending.

The G7 rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no specifics on collective action.

Kenneth Rogoff, a Harvard University professor and former IMF chief economist, said the G7 would have been better served adopting some version of the British plan so that banks would feel confident enough to loosen their grip on lending.

“Saying that they’ll take all steps necessary leaves hanging the question of whether they know what is best and necessary,” he told Reuters. “It was a signature moment for the G7. I think markets are going to be very disappointed.”

Asharq Al-Awsat

Asharq Al-Awsat

Asharq Al-Awsat is the world’s premier pan-Arab daily newspaper, printed simultaneously each day on four continents in 14 cities. Launched in London in 1978, Asharq Al-Awsat has established itself as the decisive publication on pan-Arab and international affairs, offering its readers in-depth analysis and exclusive editorials, as well as the most comprehensive coverage of the entire Arab world.

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