Financial crisis: World leaders pledge to part-nationalise swathes of global banking
Pastor Dale Morgan
*Financial crisis: World leaders pledge to Nationalize global banking
System*
World leaders have pledged to part-nationalise swathes of the global
banking system as part of a drastic international plan to halt the panic
gripping financial markets and prevent the crisis from descending into a
global depression.
By Edmund Conway, Economics Editor, in Washington
Last Updated: 8:54AM BST 11 Oct 2008
Finance ministers from the Group of Seven leading world economies,
including the UK and US, said they stood ready to pump public money into
banks in order to prevent them from collapse.
The agreement came as Chancellor Alistair Darling admitted that the UK
was facing "turbulence the like of which we have never seen" and after
markets ended their worst week in history, with shares having fallen by
more than a fifth on all leading stock exchanges.
The G7 presented a five-point "Plan of Action" to arrest the turmoil,
including, most significantly a promise to "ensure that our banks…can
raise capital from public and well as private sources, in sufficient
amounts to re-establish confidence and permit them to continue lending
to households and businesses."
It leaves the G7 – which also includes Japan, France, Italy and Canada –
open to start buying bank shares with taxpayers' cash.
US Treasury Sectretary Hank Paulson said he was preparing to use the
American $700bn bail-out scheme to fund buying troubled banks' shares.
It mirrors Gordon Brown's £50 billion bail-out of Britain's struggling
institutions unveiled earlier this week.
With investors gripped by panic, the FTSE 100 has fallen by 21 per cent
this week, and yesterday alone suffered a drop of 8.9 per cent – the
third biggest in history.
Despite assurances from President George W Bush, shares in Wall Street
fell for an eighth successive day on Friday, while the pound and the
euro slumped against other currencies.
The agreement produced last night by finance ministers in Washington is
thought to represent a last-ditch attempt for governments to prevent the
financial crisis from worsening yet further next week. Some experts fear
that unless it succeeds in boosting confidence the financial system may
collapse entirely, threatening a worse economic slump than was
experienced in the 1930s.
The G7 statement, which was among the most eagerly awaited in recent
history, said: "[We agree] today that the current situation calls for
urgent and exceptional action."
Mr Paulson described the G7 statement as "an aggressive action plan to
address the turmoil in global financial markets and the stresses on our
financial institutions."
Among the five pledges was a promise to protect savers' deposits when
banks collapse.
It came after Mr Darling and Bank of England Governor Mervyn King
pledged to do everything in their power to prevent economic catastrophe.
On a frenzied day in financial centres across the world, Mr Darling
urged his fellow ministers to "step up to the mark and do something"
Fears will remain about whether the plan is enough to arrest the decline
in shares, since the UK plan did not prevent further falls in equities.
However, the plan is as far-ranging and dramatic as many, including Mr
Darling, had hoped.
Around $4,600 billion has been wiped off the value of shares worldwide
this week – more than one and a half times the total amount of cash
generated by the UK economy last year.
Experts said yesterday that confidence was unlikely to return to markets
until they were convinced that all major economies would take similar
forthright steps to rescue the global banking systems.
On a frenzied day in financial exchanges throughout the world:
- The FTSE 100 dropped beneath the talismanic 4,000 mark for the first
time since 2003, dropping 381.74 points to 3932.06. Money markets
remained frozen.
- The pound dropped to its weakest level in five years, slumping below
$1.70 against the dollar. By last night it was down almost a cent and a
half to $1.69485.
- Oil prices dropped beneath the $80 a barrel mark for the first time in
a year.
- President George W Bush pledged to end the vicious cycle of
"uncertainty and fear" but offered no new remedies for the problem.
Presidential candidate Barack Obama urged G7 ministers to do something
to end the turmoil.
- The Icelandic Prime Minister admitted domestic customers will get
priority over British savers as the country's banks are wound up. It
also emerged that the International Monetary Fund has sent emissaries to
Iceland, and may arrange a bail- out package within days – the first IMF
rescue of a major economy since Britain in the 1970s.
As he went into the G7 meeting, held alongside the annual IMF meetings
in the US capital this weekend, Mr Darling said the world stood on a
dangerous tipping point.
"We like everybody else have been affected by turbulence the like of
which we have never seen," he said. "We need to strengthen the financial
system," he said. "If international co-operation is to mean anything it
means governments need to move on from talking about a general approach
and actually doing something to resolve the problems that we face."
With the financial turmoil worsening by the day, fears are growing for
the health of the wider economy. Most economists now believe the UK is
already in recession, and the International Monetary Fund this week
slashed its forecasts for British economic growth by more than any other
advanced economy. With businesses unable to get finance, there are now
fears the UK could suffer a depression that lasts not for months but for
years, with rising unemployment and falling profits.
Mr King said: "Central banks will work together as we demonstrated this
week, to ensure sufficient short term liquidity is provided to stabilise
banking systems. But it is also vital that governments work together to
ensure their banking systems are recapitalised to enable them to lend to
finance spending in the real economy."