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WASHINGTON: The United States will buy up to 250 billion dollars worth of bank shares in the latest bid to end the financial crisis, officials said on Tuesday, as forecasters warned two key European economies were falling into recession.
After markets surged on the back of rescue packages in Asia and Europe, US Treasury Secretary Henry Paulson delivered his own shot in the arm by announcing nine large banks - including Citigroup, JPMorgan Chase and Bank of America - would give the government equity stakes in exchange for new capital.
The government will also temporarily guarantee bank debt and interbank lending and offer unlimited deposit insurance for many accounts.
The efforts are part of a 700-billion-dollar bank bailout announced last month. European nations announced their own 1.8 trillion euro (2.4 billion dollar) package on Monday after a weekend pledge by the world's wealthiest nations to use all available tools to save key financial institutions.
"Today's actions are not what we ever wanted to do - but today's actions are what we must do to restore confidence to our financial system," said Paulson.
"Government owning a stake in any private US company is objectionable to most Americans - me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."
A series of bank rescue packages were unveiled Monday in which Germany alone included 400 billion euros in loan guarantees and 80 billion euros in fresh capital.
The Bank of Japan also announced new steps on Tuesday aimed at thawing frozen bank lending, offering unlimited dollar funds, as it left its super-low interest rates on hold at an extraordinary meeting.
The moves helped to fuel a powerful rally on Asia's biggest bourse, with the Nikkei soaring more than 14 percent, its biggest-ever gain.
Australia launched a 7.25 billion US dollar economic stimulus package which Prime Minister Kevin Rudd said was intended to address concerns that the crisis was moving beyond dramatic losses in share values to pose a threat to economic growth.
After experiencing the biggest rally on Monday in 75 years, Wall Street's rebound petered out on Tuesday with stocks turning mixed and showing a small gain of 42.69 points.
European stock markets closed with solid gains for a second straight day.
In London the FTSE 100 index of leading shares rose 3.23 percent, the CAC 40 in Paris added more than 2.75 percent, while the Frankfurt Dax gained 2.70 percent at the finish.
Some of the shine from the renewed financial market confidence was rubbed off by downbeat data highlighting how the turbulence had affected jobs and growth.
A new Bank of France forecast predicted growth would drop to minus 0.1 percent in the third quarter, showed the country was heading into recession after a 0.3 percent contraction in the previous three months.
A group of German economic think tanks said that Europe's biggest economy was likely to grow at only around 0.2 percent in 2009.
"In the autumn of 2008, the German economy is on the brink of a recession," the six institutes wrote in their latest economic outlook.
In London, figures showed Britain's inflation rate surged to a 16-year high-point of 5.2 percent in September.
Ireland's economy will contract by 0.75 percent next year, Irish Finance Minister Brian Lenihan said as he delivered his budget.
British Prime Minister Gordon Brown said the next few days would be "crucial" and urged EU leaders - who meet in Brussels on Wednesday and Thursday - to take fast action to shore up banks and get them lending amongst themselves again.
Markets across the globe have been in a state of panic since the middle of last month when Wall Street investment bank Lehman Brothers filed for bankruptcy after the US government refused to bail it out.
Banks and other financial institutions across the world have been hit by bad debts stemming from the granting of so-called sub-prime loans to house-buyers in the United States who subsequently defaulted.
Evidence of the impact on jobs came as German automaker Daimler said it was to cut 3,500 jobs in the United States and Canada following a slump in demand, a day after Japan's Nissan announced 1,680 jobs were being axed in Spain. - AFP/ls/de
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