Govts shield businesses from credit tsunami

October 24, 2008
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, WASHINGTON, October 24 – Governments around the world rolled out fresh measures to shield businesses and banks from a looming "credit tsunami" as global stock markets endured further turbulence.

While new figures showed cross-border lending by banks had suffered its biggest decline for a decade, French President Nicolas Sarkozy announced a sovereign wealth fund to protect strategically important firms and Britain\’s government leant on bank bosses to start loosening the purse strings.

Meanwhile Alan Greenspan, who ended his 18-year stint as chairman of the US Federal Reserve before a years-long housing bubble burst, warned that a "once-in-a-century credit tsunami" would pummel consumer spending and jobs.

There was mixed news on the markets with the Dow Jones Industrial Average falling 0.77 percent in early trade after a tumble of more than 500 points on Wednesday, while in Asia, Tokyo\’s Nikkei index fell 2.46 percent.

However the London FTSE 100 index added 1.16 percent to finish at 4,087.83 while in Paris the CAC 40 rose 0.38 percent to 3,310.87 and the Frankfurt Dax fell 1.13 percent to close at 4,519.23.

The falls in Asia came despite an announcement of further measures designed to restore confidence in the finance sector and among consumers.

Japan\’s central bank said it had injected 600 billion yen (6.2 billion dollars) into the short-term money market while the International Monetary Fund moved to bail out Pakistan, which could need as much as 15 billion dollars to help pay mounting foreign debt.

Canada\’s Finance Minister Jim Flaherty meanwhile said the government would guarantee interbank loans over the next six months so that "financial institutions can continue lending to consumers, homebuyers and businesses".

Governments around the world have unveiled packages over the last month totalling more than three trillion dollars, including loan guarantees and cash injections, to restore confidence to banks and reverse a drop in lending.

The scale of the drop was illustrated by figures from the Bank for International Settlements, the world\’s biggest central banking body, which showed cross-border lending by banks fell 1.1 trillion dollars in the second quarter of 2008 — even before the worst of the latest crisis.

Sarkozy said the events of recent weeks had discredited free-market ideology and showed economies needed strong state intervention to succeed.

"The ideology of the dictatorship of the market … is dead," he said, in a speech in which he announced that France would set up a sovereign wealth fund to "intervene massively" in companies of national strategic importance.

The creation of the fund would not increase public debt, he insisted, since the state would hold shares in the firms concerned and would be able to sell them later at a profit, once the financial crisis has passed.

Sarkozy\’s proposal however did not go down well in Berlin where the German government said any such measures must be compatible with European Union rules.

In Britain, ministers promised to help iron out the problems facing small firms in securing loans after they met bosses of leading banks which benefitted from a recent 37-billion-pound (47-million-euro, 60-million-dollar) bailout.

"The banks don\’t want to pull the plug unnecessarily on small businesses. They want to help where they can but the banks at the same time are facing difficult conditions of their own," said Business Secretary Peter Mandelson.

Sweden\’s central bank meanwhile tried to encourage consumer confidence by slashing its key interest rate by half a percentage point to 3.75 percent and said it planned to make further cuts within six months.

The ongoing financial crisis began with the emergence of problems on the US housing loan market last year. Defaults on so-called subprime mortgage loans set off a chain reaction of problems for banks and other institutions across the globe at a time when the global economy was already slowing.

The crisis has already brought down Lehman Brothers and a report in Thursday\’s Wall Street Journal said that another US investment bank, Goldman Sachs, plans to slash 10 percent of its workforce of 32,500 employees.

Greenspan, whose once praised economic policies have come under renewed scrutiny in light of the crisis, said it was inevitable there would be a significant spike in unemployment.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," he told Congress.

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