World leaders grapple with crisis as recession looms

HONG KONG (Reuters) – Policymakers around the world scrambled for ways to bolster their economies and banks with South Korean and Australian leaders holding emergency meetings in the face of mounting signs of a severe global downturn.

Authorities in Seoul met to discuss emergency steps to shore up the country’s banks and Australia’s Prime Minister held a summit with industry leaders who gave a grim assessment of business conditions in the face of global financial turmoil.

European Commission President Jose Manuel Barroso and French President Nicolas Sarkozy are set to meet U.S. President George W. Bush on Saturday to discuss a global summit to overhaul the world’s financial system.

South Korea is seen by many analysts as one of the region’s most vulnerable to the financial crisis because of its heavy load of foreign debt relative to the size of its economy, Asia’s fourth largest. Shares in Korean financial firms fell sharply in volatile trade.

After governments pledged $3.2 trillion to stabilize the financial sector, money markets have shown tentative signs of healing, though the significant damage to short-term lending markets has far to go before it returns to where it was 14 months ago before the crisis began.

Policymakers were still trying to stabilize their financial systems. Singapore, one of Asia’s richest economies, and Malaysia both said they would guarantee all bank deposits until 2010, following similar moves by other governments.

Asian shares edged up for the first weekly gain since August on reduced risks of a total meltdown, though U.S. Treasury debt prices and the U.S. dollar also rose as investors held on to defensive strategies.

Both investors and world leaders have turned their attention to the economies, which began to suffer in the last few months amid a series of bank failures and heavy stock market losses.

European shares opened higher, buoyed by investors picking up low-priced bank shares and following gains in the United States and Asia. At 0750 GMT, the FTSEurofirst 300 index of top European shares was up 3.7 percent.

ASIAN ACTION

Asian governments scrambled to find ways to shore up their banks and try to combat an economic slowdown.

Reflecting growing alarm over the widening credit crisis, a panel of Japan’s ruling Liberal Democratic Party was considering schemes to recapitalize big banks with government money, Kyodo news agency reported.

In Korea, top finance officials held emergency talks to discuss ways to boost confidence in its banks after the won suffered its biggest single-day decline against the U.S. dollar in 11 years on Thursday.

Australia’s prime minister held a summit with industry leaders who gave a grim assessment of business conditions. They said credit was drying up and smaller firms were collapsing despite government assurances the economy was in good shape.

Singapore, one of Asia’s richest economies, and Malaysia both said they would guarantee all bank deposits until 2010, following similar moves by other governments.

After world governments pledged $3.2 trillion to stabilize the financial sector, money markets have shown tentative signs of healing, though interbank lending is still tentative at best.

Short-term U.S. dollar rates fell for the fourth day on Asian money markets but while the cost of borrowing dollars for a day eased further to near the Federal Reserve’s target, longer term rates remained high showing banks fear lending to each other for anything but the shortest periods of time.

 

Overnight deposits at the European Central Bank eased back slightly from their record high but remained above 200 billion euros for the second day running — more evidence that banks prefer to house cash with central banks rather than their commercial counterparts.

RECESSION

The world’s richest nations are in or close to recession and Bank of Japan Governor Masaaki Shirakawa said there was growing uncertainty over the bank’s view that the economy would return to moderate growth.

"We must be mindful of how recent global financial market turmoil could, through worsening world economic conditions, affect Japan’s economy," he said.

European Central Bank policymaker Guy Quaden said the euro zone’s economic prospects had deteriorated over the last week amid the latest leg of the financial crisis,

Signs of trouble in China increased uncertainties about the world’s main source of growth.

Listed Chinese firms put more than $1 billion of fund-raising plans on ice as the global credit crisis and falling share prices begin to cast a chill over China’s fast-growing economy.

And hundreds of workers gathered outside a shuttered toy factory in southern China, after a Hong Kong-listed toymaker closed as tough times were made worse by U.S. economic weakness.