UK Crisis Britain unveils bailout for major banks October 09, 2008 AFP
Britain rushed out a package worth up to $US875 billion ($A1.23 trillion) to head off a banking collapse as markets went into freefall over fears the worst financial crisis in decades has still not hit a peak.
Panic selling set hit key European and Asian stock exchanges and a drop of nearly 10 per cent in Tokyo prompted Japanese Prime Minister Taro Aso to voice "huge fears" for the future of the world's second biggest economy.
Central bank moves to increase the amount of available credit did little to calm the frenzy.
Unveiling a package which will see Britain's eight main banks part-nationalised, Prime Minister Gordon Brown said "extraordinary times call for ... bold and far-reaching solutions."
The government said it would use STG50 billion ($US87 billion/$A123.55 billion) to buy major stakes in HSBC, Royal Bank of Scotland, Barclays, HBOS, Lloyds TSB, Standard Chartered, Abbey and Nationwide Building Society.
It would also make available STG200 billion ($A494.2 billion) in short-term loans and issue STG250 billion ($A617.74 billion) to guarantee loans between banks.
The government hopes the measures will overcome bank reluctance to lend to each other - the root of the financial crisis.
Brown called for "European-wide funding plan" to help ease the global financial crisis and said proposals had been made to other nations.
Britain's rescue initiative followed desperate efforts by other governments and institutions.
The European Central Bank said it would pump $US70 billion ($A98.7 billion) into interbank money markets in one-day loans, raising the daily amount by $US20 billion ($A28.2 billion).
The US Federal Reserve said it would buy up short-term debt - extending its move into the economy - and central bank chairman Ben Bernanke strongly hinted that a US interest rate cut was on the cards.
Japan and Australia pumped billions of dollars into the banking system and Hong Kong slashed interest rates, but there was no stopping the market misery.
"These sorts of measures aren't working anymore," said Hiroichi Nishi, a broker at Nikko Cordial in Japan. "It's like you're trying to pump blood into a heart with clogged arteries."
The Tokyo stock market suffered what amounted to an indiscriminate sell-off, with investors dumping shares across the board, sending the Nikkei down 9.38 per cent - its biggest one-day plunge since the stock market crash of 1987.
"Honestly, this for us is beyond our imagination. We have huge fears going ahead," Prime Minister Aso told a parliament committee.
London's FTSE 100 index was off by 6.76 per cent at 4,293.88 points, after the government announcement.
Trading was frozen on Russia's two main stock markets after plunges of more than 11 per cent in initial trading.
In Frankfurt, the Dax index of blue-chip shares had lost 6.77 per cent to 4,965.67 points, hitting levels last seen in late September 2005. French stocks fell 8.18 per cent.
On Wall Street, the Dow Industrial average gave up 5.1 per cent on Tuesday to close at a new five-year low.
Market dramas were played out around the world with stocks in Saudi Arabia - the largest bourse in the Middle East - slumped by more than 7.5 per cent, trading below the 6,000-point mark for the first time in more than 52 months.
Governments tried new measures to shore up confidence and keep money available to banks in the face of a credit crunch sparked by subprime mortgages gone bad in the United States.
Japan pumped another 2.1 trillion yen ($US20.7 billion; $A29.2 billion) into money markets, its 16th straight day of intervention, while Australia injected more than $US850 million ($A1.2 billion).
But the open market operation by the Reserve Bank of Australia offset a banking system cash deficit of just under $A1.2 billion, and left a total exchange settlement account balance of about $A9.6 billion.
US President George W Bush discussed the economic meltdown with leaders of Britain, France and Italy, seeking a common strategy ahead of crisis talks between the Group of Seven major economies in Washington on Friday.
"We live in a globalised world," Bush said. "We want to make sure that we're effective."
The toll on the world economy is becoming clearer with as much as $US2 trillion ($A2.8 trillion) wiped off the value of US retirement plans in the last 15 months, the head of the Congressional Budget Office, Peter Orszag, said.
There was also grim news on the jobs front with beleaguered Swedish car maker Volvo saying it planned to cut another 3,000 jobs.
The crisis has its roots in a wave of loans to US homebuyers with dark credit histories. Once people began to default on so-called subprime mortgages, a chain reaction of chaos ensued.
Housing foreclosures sent home values plunging, and the US housing market fell apart. Meanwhile the loans themselves had been re-packaged as complicated investment products and resold.
As bank after bank realised the extent of its investment in these bad debts, they saw they had less money available to make new loans while their own share prices began to collapse - and the meltdown began.
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