IMF warns of financial meltdown

Gloomy prognosis comes as European leaders meet in Paris, vowing to contain the crisis.

    The IMF has offered its backing for the G7's plans to tackle the deepening crisis [AFP]

    Spreading crisis

    Strauss-Kahn expressed hope that government actions would prove powerful enough to persuade banks to resume lending and bring an end to a spreading credit crunch.

    "In the coming days ... what I expect is that the reaction by the different institutions will be positive enough to unfreeze the different markets and to restore the necessary funding," he said.

    Later on Sunday, Nicolas Sarkozy, the French president, welcomed European leaders to the summit in Paris, saying he expected "an ambitious, co-ordinated plan" to contain the financial crisis.

    Representatives from 15 countries in the Euro-zone will be hearing from Gordon Brown, the British prime minister.

    He is expected to urge them to adopt a programme similar to that in the UK - in which governments take out large stakes in their country's banks.

    Bank rescue

    Meanwhile, The Sunday Times newspaper in London said Britain would launch its biggest retail bank rescue on Monday when the four largest banks - HBOS, Royal Bank of Scotland, Lloyds TSB and Barclays - ask for a combined $60.5bn lifeline.

    The unprecedented move would make the government the biggest shareholder in at least two banks, HBOS and Royal Bank of Scotland, the newspaper said on its website. It did not give a named source for its information.   

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    No government officials or representatives from the four banks were immediately available to comment on the report.

    Australia also announced that it would guarantee all bank deposits for three years and guarantee wholesale funding to Australian banks in an attempt to combat the credit crisis.

    Australia would also make $2.6bn available for mortgage-backed securities to help maintain liquidity for non-bank lenders, Kevin Rudd, the prime minister, told reporters.

    Amid the financial turmoil, markets in the Middle East continued to spiral downward on Sunday, the first day of the business week for most countries in the region.

    The Qatar Index fell 7.18 per cent by the close. In Saudi Arabia they have continued to fall after Saturday's four-year low - this time by 2.59 per cent.

    In Dubai, stocks were also down by 5.41 per cent, and in Egypt, they have dropped by 5.39 per cent.

    The IMF said it backed a plan by the G7 most industrialised nations to try to stabilise markets and urged "exceptional vigilance, co-ordination and readiness to take bold action" to contain a firestorm that pushed global stocks to five-year lows on Friday.

    Beyond talk

    Christine Lagarde, France's economy minister, said the Sunday gathering would go beyond talking about remedies to "put meat, muscles on the bones of that skeleton and to develop, follow up and execute upon it".

    The US appealed for patience but the IMF said time was short after the G7 nations - which include the US, Britain, France, Germany, Italy, Japan and Canada - failed to agree on concrete measures to end the crisis at a meeting on Friday.

    George Bush, the US president, met G7 economic chiefs and officials from the IMF and World Bank and said top industrial nations would work together to solve the crisis.

    "I'm confident that the world's major economies can overcome the challenges we face," he said.

    'As fast as possible'

    Bush said that Washington is working as fast as possible to implement a $700bn financial bailout package approved a week ago.

    "The benefits will not be realised overnight, but as these actions take effect, they will help restore stability to our markets and confidence to our financial institutions," Bush said.

    He acknowledged that the market disruption originated in US mortgage markets but said that everyone must help to resolve it.

    "It doesn't matter if you're a rich country or a poor country, a developed country or a developing country - we're all in this together. We must work collaboratively."

    SOURCE: Agencies


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