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BW Businessworld

EU Can Aid Euro

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The European Union pledged on Tuesday to bail out any struggling euro zone members before they turn to the International Monetary Fund (IMF) and said it was strong enough to combat the global financial crisis.

The European Union has tried to overcome divisions in its response to the crisis, vowing at a weekend summit to spur economic growth without breaking single market rules.

But it has struggled to find a common response to the growing economic problems in eastern and central Europe, where growth from foreign investment has taken a sharp fall and threatens to worsen precarious banks in western Europe.

"If crisis emerges in one euro zone country, there is a solution before visiting the International Monetary Fund (IMF)," EU Monetary Affairs Commissioner Joaquin Almunia told a seminar organised by the European Policy Centre thinktank, adding that he would not discuss the plan in public.

"We are equipped politically and economically to face this crisis scenario."

The global recession would be deeper than the IMF forecast a month ago, the chief economist of the Organisation for Economic Cooperation and Development (OECD) said on Tuesday.

"The recession will deepen ... there's no doubt," Klaus Schmidt-Hebbel told Reuters in an interview in Paris. "I think this quarter will be the worst quarter of all."

On Jan. 28, the IMF cut its forecast for global growth in 2009 to 0.5 per cent from 2.2 per cent. It forecast a 2.0 per cent slide in economic output from the world's most advanced economies.

European shares hit a lifetime low as banks reversed early gains, with the pan-European FTSEurofirst 300 index of top shares down 1.3 per cent at 673.41 as of 1029 GMT.

Quantitative Easing

Governments and central banks have struggled to get funds flowing to companies after banks, hurt by investments in debt linked to US subprime mortgages and rising bad debts, restricted lending to try to conserve cash.

US insurance giant AIG secured on Monday a $30 billion US government lifeline.

British Prime Minister Gordon Brown on a visit to Washington is expected to press US President Barack Obama for support for his plan to tighten regulation and details on plans to fix the US financial sector.

The Bank of England is expected to cut interest rates on Thursday and finance minister Alistair Darling has said the bank may decide to start buying assets with newly created money to supply more funds to an economy in its deepest slump since 1980.

Analysts expect the UK's central bank to halve its benchmark rate to 0.5 per cent and then agree on a first instalment of quantitative easing, a policy of pumping unlimited funds into the economy when rates are already close to zero.

"We've given them the levers," Darling told the Daily Telegraph newspaper. "They may decide this month that it's appropriate to do so."

The European Central Bank is also expected to shave half a point off its benchmark to a record low of 1.5 per cent on Thursday and is also seen considering more unconventional ways of reviving lending.

In Asia, Japan said it would lend $5 billion from its hefty foreign reserves to a state-backed bank charged with funneling funds to companies in trouble.

Toyota Motor Corp said a financial services unit had applied for funds, with state-run broadcaster NHK reporting the firm was seeking 200 billion yen ($2.1 billion).

Australia's central bank kept its interest rates steady on Tuesday, encouraged by signs of the economy's resilience.

Its economy has yet to contract and the central bank still has room for manoeuvre with its main cash rate at 3.25 per cent, though markets see a clear threat of recession and expect rates to fall further.

(Reuters)


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