THE FEDERAL Reserve is widely expected to cut US interest rates on Wednesday in the face of continuing turmoil in financial markets and a deepening deterioration in worldwide economic activity.
This week's data releases are likely to strengthen investors' widespread fears the global economy is heading for recession. Central banks are likely to launch new co-ordinated emergency action this week to calm panic in financial markets. Markets have priced in a 50 basis points cut in US rates to 1 per cent on Wednesday. The Fed is under pressure to deliver, given the deterioration.
Global financial markets are still at risk of collapse and turmoil will continue until at least the end of 2009, Peer Steinbrück, German finance minister, warned yesterday. Mr Steinbrück said he would not try to fool the German public by claiming the government had everything under control: "The danger of a collapse is far from over. Any attempt to give the all-clear would be wrong."
His comments came as many German banks continued to shun the government's "financial market stabilisation fund", which offers up to €400 billion in credit guarantees and up to €80 billion to recapitalise banks, including the option of purchasing toxic assets.
Unlike in the US and UK, the German scheme does not allow the government to compel banks to accept new capital. Some of these institutions fear investors will punish them if they admit they need help.
Western banks may still not have produced reliable accounts of their balance sheets, suggesting more writedowns and capital injections could be necessary, said Heizo Takenaka, the former Japanese economy minister often credited with ending the country's 10-year banking crisis. Mr Takenaka, who from 2001 forced banks aggressively to write down bad loans and to repair balance sheets by raising capital, said "more intellectual effort" was needed by western institutions to flush out the full extent of toxic assets.
The International Monetary Fund (IMF) and Ukraine have reached an agreement in principle for a $16.5 billion loan package to ease the effects of the global financial crisis. "An IMF staff mission and the Ukraine authorities have today reached agreement, subject to approval by IMF management and the executive board, on an economic programme supported by a $16.5 billion loan under a 24-month stand-by arrangement," said IMF managing director Dominique Strauss-Kahn.
The agreement with Ukraine follows a $2.1 billion IMF package for Iceland on Friday and further announcements are expected as talks with Hungary advance, as emerging markets turn to the IMF to prop up their financial sectors.
Kuwait yesterday suspended trading in the shares of the nation's second-largest commercial bank, after it was revealed it had made losses from derivatives, and moved to guarantee all local bank deposits. The central bank said it was appointing a supervisor to monitor Gulf Bank's treasury management and monetary market activity.
Saudi Arabia unveiled plans to deposit 10 billion riyals (€2.1 billion) into the Saudi Credit Bank, established to extend interest-free loans to poor citizens. Gulf stocks fell sharply in trading yesterday.
South Korean president Lee Myung-bak yesterday called for strong action to address the country's mounting financial problems, following an emergency meeting with top economic officials.
The Bank of Korea is to hold an unscheduled monetary policy board meeting today, where it is expected to discuss interest rate cuts. - (Financial Times, Reuters)
