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LONDON: Governments rushed out new emergency measures in a desperate bid to stop the haemorrhaging of confidence on Thursday, bringing some calm to shell-shocked markets as the US treasury secretary warned more banks could go to the wall.
Iceland, battling national bankruptcy, took over the country's biggest bank, the US Federal Reserve pumped another 38 billion dollars into insurance giant AIG while central banks in Asia followed a US and European lead by cutting interest rates.
But although the measures brought some calm to the markets, the International Monetary Fund forecast that the world economy was now entering a major downturn.
Iceland's government nationalised Kaupthing, completing a state takeover of the top three banks after Landsbanki and Glitnir were saved over the past week.
As the financial sector dominates the Atlantic nation's economy - weighing in eight or nine times Iceland's gross domestic product - the crisis threatens the entire economy and Prime Minister Geir Haarde has warned a recovery will take "years".
Iceland will begin negotiations next week with Russia for a four billion euro emergency loan.
Despite a staggering 700-billion-dollar US bank bailout that cleared Congress last Friday, US Treasury Secretary Henry Paulson warned more US banks were expected to go under in the United States.
"One thing we must recognise - even with the new Treasury authorities, some financial institutions will fail," he said, adding that the financial chaos had "seriously impacted" the economy.
The Fed meanwhile announced it had authorized a new 37.8-billion-dollar cash infusion into American Insurance Group, after an 85-billion-dollar loan made available last month had been virtually used up.
The day after the US Federal Reserve, European Central Bank and other western central banks cut interest rates by half a percentage point, it was the turn of Asia to follow their lead.
Hong Kong slashed its key rate by a half percentage point, while Taiwan and South Korea also announced cuts.
The crisis measures prompted an initial market rebound, with the Tokyo Stock Exchange's benchmark Nikkei-225 index rising into positive territory for the first time in a week before closing down 0.5 per cent.
Hong Kong's Hang Seng Index rose 2.65 per cent in afternoon trade, recovering some of its recent losses.
Early reaction on the markets in Europe was also positive with London's stock market rebounding 1.48 per cent at the start of trading, French stocks rising 2.09 per cent and Frankfurt's DAX opening 0.81 per cent higher.
Justin Urquhart-Stewart, marketing director at Seven Investment Management, said the rate cuts were "exactly what we needed, and reinforces the message this is a coordinated international response to a very dangerous situation".
"Now that we've reached Defcon One in the banking system, thank heavens we're getting the right reaction, because the alternative is unthinkable," he added. Defcon One is the US military's highest level of alert.
Wall Street on Wednesday dropped 2.01 per cent after a highly volatile session. The Dow Jones Industrial Average has now shed 14.7 per cent over the past six trading days.
In another bid to keep cash flowing through the financial pipeline, the European Central Bank said it would pump 100 billion dollars (74 billion euros) back into interbank money markets in one-day loans, raising the daily amount by another 30 billion dollars.
The operation has become a daily event but the increased sum, which followed a raise of 20 billion on Wednesday, suggested tension remained at very high levels in the eurozone markets.
Speaking on French television, European Central Bank chief Jean-Claude Trichet said "excessive pessimism is ill-advised".
"We all together call upon the market participants who are in this state of intense turbulence, we tell them to collect themselves," he said. "There are elements of confidence out there."
With the world's top economic policy makers headed to Washington for the annual meetings of the International Monetary Fund and World Bank on Monday, Trichet said, "It is very important that we coordinate as closely as possible".
- AFP/yt
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