More U.S. banks turn to Treasury; G7 sounds yen alarm

Mon Oct 27, 2008 2:52pm EDT

By Emily Kaiser

WASHINGTON (Reuters) - More U.S. banks lined up for government cash and the Group of Seven expressed concern the soaring Japanese yen posed a threat to financial and economic stability as recession worries spread worldwide.

Countries in Europe and Asia took emergency actions to shore up their financial positions. South Korea cut interest rates, Australia intervened in the currency market, and the International Monetary Fund moved to help Hungary and Ukraine.

The credit crisis, which began with failing U.S. mortgages, has mushroomed into a worldwide rout as investors sell stocks and commodities, shun risky emerging markets and seek out only the safest government bonds and currencies.

But there were some promising signs that government efforts to revive credit markets were beginning to pay off as borrowing costs eased.

London interbank lending rates moderated somewhat and the U.S. Federal Reserve set the terms for its program to buy commercial paper, bolstering a market that is vital for funding companies' day-to-day business activities.

U.S. stocks reversed early losses. The Standard & Poor's 500 index was up 0.8 percent in mid-afternoon trading amid hopes of a credit market thaw.

Financial companies including Comerica Inc, SunTrust Banks Inc and State Street Corp agreed to sell stakes to the U.S. Treasury Department as part of the $700 billion rescue plan approved by Congress earlier this month.

The U.S. government was also considering at least $5 billion in aid to facilitate a merger between hobbled auto makers General Motors and Chrysler, according to a source familiar with Treasury's thinking.

Loews Corp, a conglomerate run by the billionaire Tisch family, said it would inject up to $1.25 billion of new capital into its CNA Financial Corp commercial insurance unit after bad investments drove up losses.

In the U.S. housing market, the root of the global crisis, government data released on Monday showed that sales of newly constructed single-family homes rose in September and inventories shrank as builders slashed prices to their lowest level in four years.

The U.S. central bank is almost certain to trim short-term interest rates at its policy-setting meeting later in the week, and British Prime Minister Gordon Brown hinted that central bank action may be more widespread. European Central Bank President Jean-Claude Trichet also signaled that a rate cut was coming, perhaps next week.

"I consider possible that the Governing Council will decrease interest rates once again at its next meeting on November 6," he said in a speech at a banking conference in Madrid. "It is not a certainty, it is a possibility.

While Wall Street pared losses, world financial markets reacted sharply to the twin perils of financial crisis and global recession.

MSCI's main world stock index was down 2.6 percent, closing in on a 50 percent decline for the year to date. Its emerging market counterpart was down 3.7 percent, having earlier hit a four-year low.

The FTSEurofirst 300 index closed down 1.7 percent.

Oil was trading up slightly, near $65 per barrel.


Volatility has surged across financial markets as investors are forced to sell assets -- often bought with borrowed money -- to repay creditors or cover margin calls as asset prices fall and credit limits are breached.

The upheaval has most recently hit currency markets.

A brief G7 statement focused on the yen, fanning speculation the Bank of Japan would intervene in currency markets for the first time in four years.

"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," said the group, comprising the United States, Japan, Germany, Britain, France, Italy and Canada.

The yen's rapid ascent against the dollar and euro is making Japanese exports much more expensive at a time when the country's overseas customers are lurching toward recession.

The dollar, however, was rising against major currencies except for the yen, so there was skepticism about whether any coordinated action on the currency would be forthcoming.

The U.S. currency was up against a basket of major currencies on Monday..

The Reserve Bank of Australia intervened in the currency market, buying Australian dollars for U.S. dollars in Europe.


Mitsubishi UFJ Financial Group, Japan's biggest bank, said it would raise up to $10.6 billion to replenish a capital base depleted by a plunging stock market and its investment in Morgan Stanley.

South Korea resorted to a record interest rate cut as policymakers grappled with the 15-month-old crisis that has shattered investor confidence, and threatens a deep recession.

The crisis was also taking a heavy toll on emerging markets as investors withdrew funds and commodity-based economies struggled with falling prices for everything from corn to copper.

The IMF said it had reached an agreement with Hungary to provide a "substantial financing package" in the next few days that would include funding by the European Union and some individual European governments.

It agreed on a $16.5 billion loan for Ukraine on Sunday.

"The focus has shifted to vulnerabilities in emerging markets, and policy initiatives aimed at reducing the impact of dysfunctional global credit markets on emerging market countries will be key in the short-term," said Goldman Sachs analyst Jens Nordvig.

(Additional writing and reporting by Jeremy Gaunt in London and Kevin Plumberg in Hong Kong; Editing by Steve Orlofsky and Brian Moss) ... VU20081027