Russia, Iceland act in bank crisis; Oz cuts rates

By Omar Valdimarsson and Keith Weir
Reuters
Tuesday, October 7, 2008

http://www.reuters.com/article/ousiv/idUSTRE49542Y20081007

Iceland took over its second largest bank on Tuesday and Russia announced an aid package for the financial sector to bail out victims of the global financial crisis.

Australia responded to the growing crisis by cutting its interest rates by 100 basis points to 6.0 percent, putting pressure on Western central banks to cut the cost of borrowing.

"Policymakers urgently need to get some traction in their policy initiatives, if disaster is to be avoided," Barclays Wealth told its clients in a note.

"Policymakers cannot make any more mistakes: the clock is ticking, and it is one minute to midnight," it added.

Home to 300,000 people, Iceland used emergency powers adopted on Monday to dismiss the board of directors of Landsbanki and put the bank in receivership, a minister told state radio on Tuesday.

Iceland also propped up its battered currency and said Russia would lend it 4 billion euros ($5.44 billion) to help it through a financial meltdown that threatens national bankruptcy. However, Russia's deputy finance minister Dmitry Pankin said Russia had not made any decision on lending money to Iceland.

Russian President Dmitry Medvedev announced an extra 950 billion roubles ($36.4 billion) of new credit for banks at an emergency Kremlin meeting after Russian stocks suffered their worst pounding ever the previous day.

Medvedev said that most of the money, which is offered over five years, would be channeled through the biggest two state- controlled banks, Sberbank and VTB.

The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession. Conditions remained poor for lending between banks.

Shares in some of Britain's biggest high street banks tumbled on news of funding talks with the government.

Royal Bank of Scotland was the biggest loser, with its shares down more than 30 percent to a 13-year low.

"The big banks and the chancellor met yesterday night. Recapitalization is one of the options being considered," a source familiar with the talks said.

U.S. officials have called for a "forceful and coordinated" global reaction to kickstart anemic bank lending but such a unified approach remains elusive.

... Rate Cuts?

Sparked by the collapse in the U.S. housing market and increase in bad loans, the crisis is the worst to hit the banking world in 80 years. People around the world are worried about protecting their savings and keeping their jobs as some of the pillars of global finance give way.

Economists said the Australian rate cut might be followed in Europe and the United States.

Economists at Citi said there seemed to be "a growing chance" of emergency rate cuts from the Bank of England and the European Central Bank in the next few days, especially if the U.S. Federal Reserve was ready to move.

Bill Gross, one of the most influential U.S. investors as head of the world's largest bond fund and chief investment office of Pimco, called for the Fed to cut interest rates to 1 percent from 2 percent.

"We are experiencing asset deflation and the threat of headline inflation is long past," he said in a note.

Japan's central bank, with far less room to maneuver, voted to keep rates unchanged, but gave a grim prognosis for the economy that hinted at more actions to boost liquidity.

Fed fund futures have priced in a probability of a 75 basis-point cut by the U.S. central bank this month.

The Bank of England is expected to cut rates from 5.0 percent on Thursday and the European Central Bank last week flagged it too could lower its rates from 4.25 percent.

European Union finance ministers were meeting in Luxembourg to try to flesh out promises to counter market mayhem and ensure no savers lose any money. The EU has been criticized for its fragmented response to the crisis and the way individual countries have broken ranks with deposit guarantees.

"We need to find a common solution as one country's solution may be another country's problem," said Swedish Finance Minister Anders Borg.

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