Tuesday, October 7, 2008

On Global Financial System Crisis...Beyond Wall Street and Main Street...Andres Agostini








Fed to start buying commercial paper

Ben Bernanke opened the door to further US interest rate cuts on a day that saw the Federal Reserve moving to bypass banks and lend directly to US companies in an unprecedented attempt to unfreeze the money markets - 18:47

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Fed chairman Ben Bernanke: the US central bank will start buying commercial paper in a bid to assuage fears that the credit crisis will spread to non-financial companies and affect basic functions such as meeting payroll needs

Wall St down after Fed liquidity plan

Financials lead losses - 18:16

Russia lends banks $37bn to stem crisis

Move follows steep falls in Moscow markets - 12:50

RBS and HBOS plunge on funding fears

RBS denies it asked government for capital - 17:18

Sullivan blames ‘mark to market’ for AIG’s woes

Accounting rule had ‘unintended effect’ - 15:38

GM cuts production in Europe

Credit crisis takes toll on car demand - 18:07

AMD spins off plants in $8.4bn Abu Dhabi deal

New partnership to build $3.2bn manufacturing plant - 13:16

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US Daily View: Fed to buy commercial paper

Aline van Duyn on the Fed’s unprecedented plan to buy unsecured debt in the commercial paper market

View from the Top: Mikhail Shamolin

The CEO of MTS says the credit crunch will soon be over and the crisis is presenting opportunities as well as dangers

Lessons from Turkey’s banking rescue

Kemal Dervis of the UNDP talks about what the IMF can do now to help the global economy


Spain announces emergency fund

Spain became the latest European nation to take unilateral measures to deal with the world’s deepening financial crisis, announcing a €30-50bn emergency fund to provide liquidity to the financial system by buying Spanish bank assets - Oct 7 2008

Fed to start buying commercial paper

Bernanke opens door to rate cut - Oct 7 2008

RBS and HBOS plunge on funding fears

RBS denies it asked government for capital - Oct 7 2008

Russia lends banks $37bn to stem crisis

Move follows steep falls in Moscow markets - Oct 7 2008

Markets routed in global sell-off

Dow falls below 10,000 - Oct 7 2008

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State to the rescue

As the global financial crisis deepens, governments have intervened to save ailing banks and in some cases have take over previously public companies. Our interactive graphic shows the value of government assistance in recent weeks

Banks Bail-out

Interactive feature: Are European banks too big to fail?

This interactive map explores the relative size of business and government. Update to shows tier 1 capital ratios for each bank, and household debt levels as percentage of GDP

Regulating short selling

Short sellers were blamed for contributing to a sharp fall in financial stocks in recent months. Our interactive graphic looks at how regulators around the world have recently targeted the practice

Comment

Conservatism overshoots its limit

Gideon Rachman

Ideas become fashionable and get pushed to their logical conclusion, as their backers succumb to “irrational exuberance”. Then comes the crash, writes Gideon Rachman - Oct-06

Tony Jackson: New panic is proof of big league crisis

Monday’s fresh outburst of panic on global markets was final proof that as financial crises go, we are now in the big league. Comparisons with the dotcom bubble or even the Asian crisis of 1997 are inadequate. We must think of 1987 or 1929, writes Tony Jackson - Oct-06

David Cameron: We will help give banks capital

Conservatives support government action when the foundations of the banking system are threatened, writes David Cameron - Oct-05

A global downturn in western power

Who are the likely political losers and winners – that is, those who lose the least – from the present financial mess, asks Dominique Moisi - Oct-05

Inadequate cover

Hank Greenberg

As a company that made pricing risk its speciality, AIG failed spectacularly to see trouble looming in the business it did with Wall Street banks - Oct-06

How an Asian bond could save us from the weak dollar

Asia’s reserves could be turned into Asia bonds that, without losing value, could stimulate trade and investment in Asia, writes Thaksin Shinawatra - Oct-06

It is time to abandon imprudent caution

Philip Stephens

Gordon Brown must take more risks. This crisis demands a politician ready to anticipate rather than respond to events, writes Philip Stephens - Oct-06

Europe: In it together

John Thornhill

Governments moved quickly to rescue failing banks but there are doubts in their ability to mount a co-ordinated response to a new phase in the crisis - Oct-03

Editorial Comment

Lex

    Markets and cannon - Oct-06

    European banks - Oct-06

    Thrust and Pari - Oct-06

    Corporate borrowing - Oct-06

More stories

Fed takes steps to bolster liquidity - Oct-06

FTSE 100 in biggest fall since Black Monday - Oct-06

Fed to hold CDS clearance talks - Oct-07

Iceland takes emergency action - Oct-07

Berlin shrugs off attacks on savings pledge - Oct-06

Tokyo hints at boost to stimulus package - Oct-06

Trading in Brazil suspended twice - Oct-06

Danish deposits backed in bank bail-out deal - Oct-06

EU resists plan for bail-out fund - Oct-06


Wall St down after Fed liquidity plan

By Alistair Gray in New York

Published: October 7 2008 14:03 | Last updated: October 7 2008 18:16

Wall Street stocks were lower on Tuesday as investors weighed Federal Reserve plans to create a commercial paper funding facility against the absence of rate cuts by world central banks.

General Electric and American Express – among the largest direct issuers of commercial paper, according to Bloomberg – were among the biggest winners from the Fed’s announcement. The pair rose 3.2 per cent at $22.07 and 3.7 per cent at $31.19, respectively.

The Fed’s intervention in the commercial paper market, which is widely used by large companies to raise short-term finance, is designed to boost much-needed liquidity.

Yet financials overall, down 4.3 per cent, led the market lower as money markets remained in paralysis.

Bank of America lost 15.6 per cent to $27.19 after the bank became the first Dow component to disclose quarterly results for the new reporting season. After the close of the previous session, the bank said it would raise $10bn in capital and halve its dividend.

Morgan Stanley and JPMorgan fell 12.6 per cent to $20.54 and 4.5 per cent to $42.03 respectively.

Merrill Lynch slid 13.6 per cent at $20.91 after Wachovia widened its third quarter loss estimate from $1.03 to $6.12 a share.

For much of on Tuesday morning, the Dow Jones Industrial Average teetered around the psychologically significant 10,000 barrier breached in the previous session after a four-day run of heavy losses.

By midday in New York, the Dow stood 1.2 per cent lower at 9,837.38 while the S&P 500 was 1.6 per cent down at 1,039.93. The Nasdaq Composite index fell 1.8 per cent to 1,828.52.

In technology, Google fell 1.4 per cent to $365.80 after Stifel Nicolaus cut its price target on the internet search group from $600 to $525.

IBM gave up 2.3 per cent to $98.31 after Barclays cut its recommendation on the stock from “overweight” to “equal-weight” due in part to its heavy exposure to the financial sector.

The energy, industrial and material sectors helped put a lid on the declines, up 1.3 per cent, 0.5 per cent and 0.8 per cent respectively.

Alcoa added 0.7 per cent to $18.24 ahead of its results due after the close. Analysts expect the aluminium producer, hit by lower prices, to report another quarterly profit decline.

An oil price recovery lifted energy stocks, such as Exxon Mobil and Chevron Corp, which rose 3 per cent at $79.67 and 1.1 per cent at $77.67, respectively.

First Solar fell 11.7 per cent to $141 and Sunpower fell 9.6 per cent to $50.03 after Goldman Sachs said solar power companies would be hurt as some governments cut subsidies for the technology. Goldman removed First Solar from its “conviction buy” list and cut its recommendation on both stocks to “sell”.

Yet the oil price rise hurt shares in some airlines. UAL Corp the parent company of United Airlines lost 14.3 per cent at $5.74 and Continental 12.8 per cent at $11.73.

In automotives, Ford and General Motors lost 13 per cent at $3.21 and 5.3 per cent at $8.03 respectively after the pair both warned they would cut output in Europe.

Illinois Tool Works lost 3.2 per cent to $37.85 after the manufacturer lowered third quarter and full-year forecasts due in part to weakness in North American industrial production.

Meanwhile in retail, Safeway rose 5.8 per cent to $23.04 on the back of better-than-expected third quarter earnings.

In consumer discretionaries, Walt Disney eased 2.9 percent to $27.45 after Merrill Lynch downgraded the the world’s biggest theme-park operator from “neutral” to “underperform”

The Chicago Board Options Exchange Volatility index, known as Wall Street’s fear gauge, fell 7.9 per cent, although at 47.92 it continued to indicate signs of extreme distress.

Tobias Levkovich, an erstwhile bullish analyst at Citigroup, cut his year-end forecast on the S&P from 1,475 to 1,200 due to “the anxiety generated by collapsing international stock markets, weaker economies around the world.”

Fed funds futures on Tuesday showed a 100 per cent probability that the Fed would cut interest rates at its meeting later in the month, and a 50 per cent probability it would cut rates by three-quarters of a percentage point.

Russia lends banks $37bn to stem crisis

By Catherine Belton in Moscow

Published: October 7 2008 12:50 | Last updated: October 7 2008 12:50

Russia said on Tuesday it would pump $37bn in long-term subordinated loans into state-controlled banks in a new measure to fight off a deepening financial crisis that has seen the steepest losses ever on the Russian stock exchange.

Dmitry Medvedev, the Russian president, announced the measure to pump five-year loans via the two biggest state banks, VTB and Sberbank, after an emergency meeting with the heads of the biggest state banks to discuss what he called “a large scale financial crisis”.

Investors said the move would provide much needed longer term liquidity into the banking system and could revive money markets that have frozen in what one fund manager called a “vicious cycle of fear.”

Shares rose in Moscow and London, with the rouble-denominated RTS index up 2.9 per cent, but remained extremely volatile.

The emergency measure comes after the benchmark RTS posted its steepest loss in its 13-year history on Monday, plummeting 19.1 per cent, while the Micex fell 18.7 per cent.

The steep falls have sent stocks spinning to their lowest levels since 2004 and erased all the gains made since Russia unveiled a $100bn-plus rescue package on September 19 aimed at restoring investor confidence.

The state rescue funds so far have been mainly pumped in as short-term deposits in the biggest banks, but failed to break a growing crisis of confidence, exacerbated by the global financial turmoil and falling commodity prices. Banks had been hoarding the cash instead of lending it on, analysts said.

The liquidity crunch has provoked a wave of panic selling, exacerbated by fears that Russia’s richest oligarchs may be forced to dump stocks because they are unable to raise cash to meet margin calls as the value of collateral pledged for tens of billions of dollars in loans plummets.

Speculation that Oleg Deripaska, Russia’s richest man, could be forced to sell his 25 per cent stake in Norilsk Nickel, the world’s biggest nickel miner – which has been pledged as collateral for a $4.5bn loan – sent the London-traded stock down 44 per cent on Monday.

Mr Deripaska had last week been forced to divest his 20 per cent stake in Magna, the Canadian car parts maker, to creditors after a wave of margin calls. Mr Deripaska’s UC Rusal insisted in a statement on Tuesday that it would not sell the Norilsk stake.

Shares in Rosneft, the state-controlled oil major, lost 41 per cent on Monday on fears that the fall in value of its shares put it in breach of covenants on a $1.8bn loan. A person close to Rosneft on Tuesday denied this was the case.

Meanwhile Gazprom, the state-controlled gas giant, lost one quarter of its value on Monday.

“There is currently little rhyme or reason to trading in the Russian stock market,” Chris Weafer, chief strategist at Uralsib investment bank, wrote in a research note on Monday. “It is as if investors are aggregating the total sum of their fears concerning the global and domestic economies. Worst-case scenario, and then some.”

RBS and HBOS plunge on funding fears

By Michael Hunter

Published: October 7 2008 08:45 | Last updated: October 7 2008 17:18

Banks were once again under pressure in London on Tuesday amid worries about the health of the financial sector, but the broader market closed fractionally higher after a volatile session.

HBOS and Royal Bank of Scotland were the heaviest fallers – closing down 41.5 per cent to 94p and 39.2 per cent at 90p, respectively. The HBOS price represented a 50 per cent discount to the terms of the offer from Lloyds TSB. Shares in Lloyds closed down12.9 per cent at 225½p.

Sullivan blames ‘mark to market’ for AIG’s woes

By Stephanie Kirchgaessner in Washington

Published: October 7 2008 15:38 | Last updated: October 7 2008 15:38

Martin Sullivan, former chief executive of AIG, the insurance giant that was rescued by the US government, on Tuesday blamed a single accounting rule for the company’s travails.

In written testimony released before he was set to testify before Congress, Mr Sullivan said that “multiple actions by multiple parties” created the “unprecedented financial market disruption” that caused his firm’s near-collapse and eventual $85bn bail-out by the US Treasury.

GM cuts production in Europe

By John Reed in London and Bernard Simon in Toronto

Published: October 7 2008 18:07 | Last updated: October 7 2008 18:07

General Motors is cutting production at most of its 10 manufacturing plants in Europe in a stark sign of the growing toll the credit crisis is taking on demand in the real economy. GM said on Tuesday it was halting production or cutting shifts at the plants for between 10 days and three weeks in response to lower sales of its Opel, Vauxhall and Saab cars.

“The financial crisis is affecting the vehicle market,” Opel said.

AMD spins off plants in $8.4bn Abu Dhabi deal

By Chris Nuttall in San Francisco

Published: October 7 2008 07:47 | Last updated: October 7 2008 13:16

Advanced Micro Devices plans to spin off its chip plants and receive a lifeline of up to $8.43bn from Abu Dhabi as it struggles to compete with its larger microprocessor rival Intel.

AMD confirmed on Tuesday a long awaited ”asset-light” strategy that will relieve it of the burden of trying to maintain manufacturing parity with its Silicon Valley neighbour.


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Fed chief suggests more rate cuts may be needed to boost economy
Updated 25m ago | Comment | Recommend E-mail | Save | Print |
Bernanke
AP

NO CHANGE
By Sue Kirchhoff and Barbara Hagenbaugh, USA TODAY
WASHINGTON — Federal Reserve Chairman Ben Bernanke Tuesday suggested the central bank may have to cut interest rates to shore up a rapidly deteriorating economy and address a credit crisis of "historic dimensions."

In a speech for delivery to the National Association for Business Economics, Bernanke said that in light of a worsening economic picture, and somewhat better inflation readings "the Federal Reserve will need to consider whether the current stance of monetary policy remains appropriate."

WHAT HE SAID: Text of his prepared speech

"The Fed chairman just gave the green light for a rate cut at the October meeting, if not before," Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, said in a note to clients.

Bernanke also warned that the economic downturn could last some time, with businesses and consumers unable to get needed credit.

"All told, economic activity is likely to be subdued during the remainder of this year and into next year," Bernanke said. "The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth."

The central bank has held its target for a key interest rate steady at 2% since the spring. In recent months, Fed officials have been in a bind, caught between slowing growth and rapidly rising inflation. In the past several weeks, however, oil and other commodity prices have fallen dramatically, while unemployment has spiked, consumer spending has slowed, and the credit crisis has spread incessantly despite numerous Fed efforts to soothe the markets, including providing hundreds of billions of dollars of low-interest loans.

Bernanke noted that the economy had shown signs of weakening even before the recent increase in financial market tensions. While he said that falling home prices and sales continued to be the primary problem in both the real economy and financial markets, he noted that "the slowdown in economic activity has spread outside the housing sector."

Rising joblessness and sluggish wages have forced consumer spending, more than two-thirds of economic activity, to "contract significantly" since May, Bernanke said. Business investment spending is under pressure.

"Even households with good credit histories are now facing difficultuies in obtaining mortgatge loans or home equity lines of credit. Banks are also reducing credit card limits, and denial rates on automobile loan applciations reportedley are rising," he said.

Bernanke said that slower economic growth and the recent decline in commodity prices should lead to an inflation rate closer to the level desired by the Fed. Still he cautioned that the outlook remained "highly uncertain" due to the extraordinary volatility of commodity prices, and promised to monitor the situation closely.

The Fed chairman said the $700 billion financial rescue package signed into law last week should, over time, stabilize markets and help banks and other lenders raise needed capital.

"These are momentous steps, but they are being taken to address a problem of historic dimensions," Bernanke said. "The Congress and the administration chose to act at a momenet of great stress, but one at which the great majority of financial institutions have sufficient capital and liquidity to return to their critical function of providing new credit for our economy."

A growing number of economists, including those at Global Insight, UBS and First Trust Advisors, have been predicting the Fed will need to cut its target for short-term interest rates this month. The Fed next meets Oct. 28 and 29, but can change rates at any time.

Investors in a market in which participants bet on future Fed moves Tuesday morning were pricing in a half-percentage point cut, according to Action Economics.

But even some economists who are expecting a rate cut question how much it will do, given that banks are spooked to the point that they are unwilling to lend, no matter what the price is.

"It probably is something that they should do, but I wouldn't expect it to be terribly effective," says Martin Baily, an economist at the Brookings Institution who says it still could provide a psychological boost. "What we're trying to do is deal with market psychology right now."

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Fed Announces Plan to Buy Short-Term Debt

By EDMUND L. ANDREWS and MICHAEL M. GRYNBAUM
Published: October 7, 2008

WASHINGTON — The Federal Reserve announced a radical new plan on Tuesday to jump-start the engine of the financial system.

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Fred R. Conrad/The New York Times

By the end of trading Monday at the New York Stock Exchange, stocks had tumbled 3 percent.

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The Fed said in a statement that it would begin to buy large amounts of short-term debt in an effort to stimulate the credit markets, which have all but dried up.

Under the program, the Fed said that it would buy the unsecured short-term debt that companies rely on to finance their day-to-day activities. “This facility should encourage investors to once again engage in term lending in the commercial paper market,” the Fed said Tuesday in a statement. “An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households.”

While the move will put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has stalled. The Commercial Paper Funding Facility, “will complement the Federal Reserve’s existing credit facilities to help provide liquidity to term funding markets,” the Fed statement said.

The Fed said it was creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies. It hopes to have the program running soon.

Also on Tuesday, European Union finance ministers gathered in Luxembourg to seek common ground to buttress the continent’s banking system in the face of the financial crisis. Despite proposals from France and Italy, the European Union has eschewed any common fiscal approach to the crisis, mainly because Germany refuses to be drawn into a scheme for fear of being burdened with the costs of rescuing non-German banks.

The finance ministers more than doubled the minimum level of guarantees for bank deposits in member countries, to 50,000 euros ($68,000), on Tuesday as they battled to shield the Continent’s banks from turmoil and build a measure of confidence in its battered financial system.

The Fed’s plan to buy commercial paper was formulated amid cascading losses in global stock markets, as the banking crisis spread across Europe and investors feared dire consequences for the world economy. The Dow Jones industrial average fell as much as 800 points before a late recovery, finishing down 369.88, below 10,000 points for the first time since 2004.

Even before bankers on Wall Street reached their desks on Monday, European stocks were plunging. The Russian stock market dropped 19.1 percent, the biggest decline since the fall of the Soviet Union. Major indexes in London and Frankfurt lost more than 7 percent; stocks in Paris fell by 9 percent. Stocks in Latin America and other emerging economies took their worst collective tumble in a decade.

Volatility reached the highest level in two decades, and oil prices fell below $90 for the first time since February.

The contagion moved to Asian with the Nikkei index of Japanese stocks closing down 3 percent and the Hang Seng index of stocks in Hong Kong fell 4.9 percent. But shares rebounded Tuesday morning in Europe, with the FTSE up 1.2 percent in London, the CAC 40 was up 1.7 percent in Paris and the DAX in Frankfurt was slightly higher.

Investors around the world are worried about what the evaporation of credit will do to an already-weakened global economy.

“There is a growing recognition that not only has the credit crunch refused to be contained, it continues to spread,” said Ed Yardeni, an investment strategist. “It’s gone truly global.”

In the United States, consumers appear to be significantly curbing spending; last month, employers cut more jobs than any month in five years. The $6 decline in oil prices, which settled at $87.81 a barrel, stemmed in part from fears that demand will slacken in the face of a deteriorating economy.

The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities.

The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

These credit fears persisted over the weekend despite the $700 billion bailout package that Congress approved last week.

Mr. Andrews reported from Washington and Mr. Grynbaum from New York. Vikas Bajaj contributed reporting.



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Bernanke: Economic outlook weaker

Fed chairman says financial crisis will dampen economy well into 2009 and hints at future rate cuts; says recent actions by Fed, Treasury should help economy recover.

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Last Updated: October 7, 2008: 1:59 PM ET

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NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke predicted that the global financial markets crisis is likely to restrain the economy well into next year and signaled that the Fed may be getting ready to cut interest rates.

But he said he believes the unprecedented steps taken to have the Treasury Department and the Fed intervene in financial markets were done in time to prevent more expensive and permanent damage to the nation's leading financial institutions.

In a speech before the National Association of Business Economics in Washington on Tuesday, Bernanke said the threat of inflation has receded recently, while the economy has continued to weaken. This could be interpreted as a sign that the central bank might be preparing to lower its key fed funds rate soon.

"Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased," he said.

"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," he added.

The fed funds rate is the primary lever the central bank uses to influence the economy. Lower rates can help reduce the borrowing costs for businesses and consumers on a wide range of loans, including business lines of credit, credit card rates and home equity loans. These cheaper loans can increase economic activity.

But lower rates can also add to inflation pressures since they tend to reduce the value of the dollar and make imported goods, most notably oil, more expensive.

The Fed cut rates seven times between September 2007 and this April, but held them steady at 2% at its past three meetings due to inflation concerns.

The Fed's next scheduled meeting is Oct. 28-29. Some investors and economists have suggested the current financial crisis could lead the Fed to announce an emergency rate cut ahead of that meeting.

Bernanke again pointed to falling housing prices as a primary cause of the problems in the nation's financial sector. But he warned "the slowdown in economic activity has spread outside the housing sector."

And he added that tighter credit conditions mean that the economic weakness is likely to continue into 2009.

"The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance," he said.

Bernanke defended the $700 billion bailout package passed by Congress and signed into law last week. The rescue plan will allow Treasury to buy damaged mortgage-backed securities from financial firms.

Bernanke said the bailout, as well as moves by the Fed this week to inject hundreds of billions more into the banking system and buy commercial paper used by many businesses to finance their day-to-day operations, were necessary actions to take at this time of economic stress.

"These are momentous steps, but they are being taken to address a problem of historic dimensions," he said.

And he predicted that the efforts would be successful in returning the economy into a growth path.

"The steps being taken now to restore confidence in our institutions and markets will go far to resolving the current dislocations in the markets," he predicted. "I believe that the bold actions taken...together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery." To top of page

First Published: October 7, 2008: 1:10 PM ET
The Fed's unlimited business loan bailout

The Fed pumps billions more to banks

Most Americans see depression as likely
Markets Last Change
Dow Jones 9,597.88 -357.62 / -3.59%
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S&P 500 1,013.99 -42.90 / -4.06%
10-year Bond 104 11/32 Yield: 3.47%
U.S.Dollar 1 euro = $1.360 0.011
October 7, 2008 2:14 PM ET
CompanyPrice% Change
Morgan Stanley 15.70 -33.19%
Yrc Worldwide Inc 5.00 -29.28%
Ual Corp 5.06 -24.48%
Merrill Lynch & Co., Inc 18.52 -23.47%
Oct 7 2:06pm ET †
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Exhausted markets slide again

Dow drops as much as 279 points as Fed credit plan fails to reassure investors. Bernanke comments add more worries.

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By Alexandra Twin, CNNMoney.com senior writer
Last Updated: October 7, 2008: 1:41 PM ET

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NEW YORK (CNNMoney.com) -- Stock declines accelerated Tuesday afternoon as investor enthusiasm about the Fed's plan to unfreeze credit markets faded and Chairman Bernanke sounded the alarm on the economy.

With 2-1/2 hours left in the session, the Dow Jones industrial average (INDU) had lost 225 points or 2.3%. The blue-chip average ended below 10,000 Monday for the first time in almost 4 years.

The Standard & Poor's 500 (SPX) index fell 2.6% and the Nasdaq composite (COMP) lost 2.8%. Both ended at multi-year lows Monday.

Credit markets remained stressed, but showed some improvement after the Fed move. Treasury prices tumbled, pushing the corresponding yields higher as investors shifted to stocks.

Stocks plunged 369.88 points on Monday, with the Dow losing as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to comfort panicky investors.

Stocks initially rose Tuesday on the Fed's latest plan, but gave up those gains by midmorning, turning lower.

"It's another step in the right direction, but it's hard to get too excited about this because nothing yet has worked," said Bill Stone, chief investment strategist at PNC Financial Services Group.

"Eventually, if they [the government] stack up enough things, something will work," he said.

He said that it's positive that the Fed and the Treasury are taking aggressive and creative approaches to handling the current crisis. However, people are exhausted after all that's happened and they are less willing to cheer a plan that won't kick in for some time.

Central bank Chairman Ben Bernanke, speaking in the afternoon, said that the economic outlook has worsened and the financial crisis will hurt the economy well into next year. He also implied that more interest-rate cuts are on the way. (Full story).

Stock declines accelerated following his comments.

Fed plan: The Federal Reserve said Tuesday it will buy commercial paper, short-term debt that companies use to finance daily operations, from individual companies. Panicky investors have been less willing to buy this kind of debt lately, making it hard for companies to get the money they need to operate.

The Fed move is aimed at creating a market for this kind of debt, ultimately loosening up the frozen credit markets. (Full story)

Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has stalled the broader financial system and hurts consumers.

The government has taken a number of dramatic steps of late to try to get the markets functioning properly again amid the housing collapse and subsequent credit crunch.

On Monday, the Fed made an additional $300 billion available to banks in return for a range of damaged assets, on top of another $300 billion already available. The Fed could expand that to $900 billion by the end of the year.

And on Friday, President Bush signed into law the $700 billion bank bailout, which involves the Treasury buying bad debt directly from banks in order to get them to start lending to each other again.

Company news: After the close Monday, Bank of America (BAC, Fortune 500) reported a steep drop in profit that was short of estimates and cut its dividend. The bank also said it will raise $10 billion through a stock sale and that the company will need to set aside money for bad loans through the coming year. Shares fell 18% Tuesday. (Full story)

Also late Monday, Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) both agreed to a legal standstill in their battle for Wachovia (WB, Fortune 500). (Full story)

AIG (AIG, Fortune 500) was in the spotlight Tuesday, in the second of several House hearings into what led to the current crisis. The government had to bail out the insurance giant with an $85 billion credit line last month to keep it from imploding.

On Monday, the House Oversight Committee questioned Richard Fuld, chief executive of Lehman Brothers, which went bankrupt last month.

A variety of bank stocks fell Tuesday, including Citigroup (C, Fortune 500), JP Morgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500) and Morgan Stanley (MS, Fortune 500).

But the declines were broad, with 28 of 30 Dow components sliding. Besides the financials, other losers included Walt Disney (DIS, Fortune 500), GM (GM, Fortune 500), Pfizer (PFE, Fortune 500), Home Depot (HD, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500), all of which lost between 4% and 5%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners three to one on volume of 800 million shares. On the Nasdaq, decliners topped advancers by two to one as 1.5 billion shares changed hands.

Global markets: Markets overseas were mixed Tuesday, a day after taking a drubbing everywhere.

Australian markets rallied after the government cut short-term interest rates by a full percentage point, surprising investors. Asian markets ended lower.

European markets were mixed. Russian markets opened late, but managed gains after having been shut down Monday following a steep selloff. (Full story)

(Europe: The new Wall Street?)

Credit markets: Measures of bank nervousness remained at elevated levels Tuesday, but showed some improvement.

The difference between the 3-month Libor and the Overnight Index Swaps fell to 2.93% from a record high of 2.97% earlier in the day. The Libor-OIS spread measures how much cash is available for lending between banks and is used by banks to determine rates. The bigger the spread, the less cash is available.

But 3-month Libor, the rate banks charge each other to borrow for three months, rose to 4.32% from 4.29% Monday.

The TED spread, which is the difference between 3-month Libor and what the Treasury pays for a 3-month loan, fell to 3.35% after hitting an all-time high of 3.95% Monday.

The wider the spread, the more reluctant banks are to lend to each other rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 0.97% from 0.44% late Monday, with investors looking for a slightly better return on their money. Last month, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.

Treasury prices dipped, propelling the yields. The benchmark 10-year note fell 6/32, lifting the corresponding yield to 3.47% from 3.45% Monday. Treasury prices and yields move in opposite directions.

Oil and gold: U.S. light crude oil for November delivery rallied $1.39 to $89.20 a barrel on the New York Mercantile Exchange, after ending the previous session at an eight-month low.

COMEX gold for December delivery rallied $14.60 to $880.80 an ounce.

Other markets: In currency trading, the dollar slipped against the euro after hitting a 14-month high against the European currency on Monday. The dollar also slipped against the yen, giving up earlier gains. (Full story)

The price of gas decreased for the 20th consecutive day, according to a survey of credit card activity.

Worried about your retirement? Tell us your story To top of page

First Published: October 7, 2008: 10:51 AM ET
The accounting rule you should care about

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50 years of profit swings
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Exhausted markets slide again

Dow drops as much as 279 points as Fed credit plan fails to reassure investors. Bernanke comments add more worries.

By Alexandra Twin, CNNMoney.com senior writer
Last Updated: October 7, 2008: 1:41 PM ET

NEW YORK (CNNMoney.com) -- Stock declines accelerated Tuesday afternoon as investor enthusiasm about the Fed's plan to unfreeze credit markets faded and Chairman Bernanke sounded the alarm on the economy.

With 2-1/2 hours left in the session, the Dow Jones industrial average (INDU) had lost 225 points or 2.3%. The blue-chip average ended below 10,000 Monday for the first time in almost 4 years.

The Standard & Poor's 500 (SPX) index fell 2.6% and the Nasdaq composite (COMP) lost 2.8%. Both ended at multi-year lows Monday.

Credit markets remained stressed, but showed some improvement after the Fed move. Treasury prices tumbled, pushing the corresponding yields higher as investors shifted to stocks.

Stocks plunged 369.88 points on Monday, with the Dow losing as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to comfort panicky investors.

Stocks initially rose Tuesday on the Fed's latest plan, but gave up those gains by midmorning, turning lower.

"It's another step in the right direction, but it's hard to get too excited about this because nothing yet has worked," said Bill Stone, chief investment strategist at PNC Financial Services Group.

"Eventually, if they [the government] stack up enough things, something will work," he said.

He said that it's positive that the Fed and the Treasury are taking aggressive and creative approaches to handling the current crisis. However, people are exhausted after all that's happened and they are less willing to cheer a plan that won't kick in for some time.

Central bank Chairman Ben Bernanke, speaking in the afternoon, said that the economic outlook has worsened and the financial crisis will hurt the economy well into next year. He also implied that more interest-rate cuts are on the way. (Full story).

Stock declines accelerated following his comments.

Fed plan: The Federal Reserve said Tuesday it will buy commercial paper, short-term debt that companies use to finance daily operations, from individual companies. Panicky investors have been less willing to buy this kind of debt lately, making it hard for companies to get the money they need to operate.

The Fed move is aimed at creating a market for this kind of debt, ultimately loosening up the frozen credit markets. (Full story)

Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has stalled the broader financial system and hurts consumers.

The government has taken a number of dramatic steps of late to try to get the markets functioning properly again amid the housing collapse and subsequent credit crunch.

On Monday, the Fed made an additional $300 billion available to banks in return for a range of damaged assets, on top of another $300 billion already available. The Fed could expand that to $900 billion by the end of the year.

And on Friday, President Bush signed into law the $700 billion bank bailout, which involves the Treasury buying bad debt directly from banks in order to get them to start lending to each other again.

Company news: After the close Monday, Bank of America (BAC, Fortune 500) reported a steep drop in profit that was short of estimates and cut its dividend. The bank also said it will raise $10 billion through a stock sale and that the company will need to set aside money for bad loans through the coming year. Shares fell 18% Tuesday. (Full story)

Also late Monday, Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) both agreed to a legal standstill in their battle for Wachovia (WB, Fortune 500). (Full story)

AIG (AIG, Fortune 500) was in the spotlight Tuesday, in the second of several House hearings into what led to the current crisis. The government had to bail out the insurance giant with an $85 billion credit line last month to keep it from imploding.

On Monday, the House Oversight Committee questioned Richard Fuld, chief executive of Lehman Brothers, which went bankrupt last month.

A variety of bank stocks fell Tuesday, including Citigroup (C, Fortune 500), JP Morgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500) and Morgan Stanley (MS, Fortune 500).

But the declines were broad, with 28 of 30 Dow components sliding. Besides the financials, other losers included Walt Disney (DIS, Fortune 500), GM (GM, Fortune 500), Pfizer (PFE, Fortune 500), Home Depot (HD, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500), all of which lost between 4% and 5%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners three to one on volume of 800 million shares. On the Nasdaq, decliners topped advancers by two to one as 1.5 billion shares changed hands.

Global markets: Markets overseas were mixed Tuesday, a day after taking a drubbing everywhere.

Australian markets rallied after the government cut short-term interest rates by a full percentage point, surprising investors. Asian markets ended lower.

European markets were mixed. Russian markets opened late, but managed gains after having been shut down Monday following a steep selloff. (Full story)

(Europe: The new Wall Street?)

Credit markets: Measures of bank nervousness remained at elevated levels Tuesday, but showed some improvement.

The difference between the 3-month Libor and the Overnight Index Swaps fell to 2.93% from a record high of 2.97% earlier in the day. The Libor-OIS spread measures how much cash is available for lending between banks and is used by banks to determine rates. The bigger the spread, the less cash is available.

But 3-month Libor, the rate banks charge each other to borrow for three months, rose to 4.32% from 4.29% Monday.

The TED spread, which is the difference between 3-month Libor and what the Treasury pays for a 3-month loan, fell to 3.35% after hitting an all-time high of 3.95% Monday.

The wider the spread, the more reluctant banks are to lend to each other rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 0.97% from 0.44% late Monday, with investors looking for a slightly better return on their money. Last month, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.

Treasury prices dipped, propelling the yields. The benchmark 10-year note fell 6/32, lifting the corresponding yield to 3.47% from 3.45% Monday. Treasury prices and yields move in opposite directions.

Oil and gold: U.S. light crude oil for November delivery rallied $1.39 to $89.20 a barrel on the New York Mercantile Exchange, after ending the previous session at an eight-month low.

COMEX gold for December delivery rallied $14.60 to $880.80 an ounce.

Other markets: In currency trading, the dollar slipped against the euro after hitting a 14-month high against the European currency on Monday. The dollar also slipped against the yen, giving up earlier gains. (Full story)

The price of gas decreased for the 20th consecutive day, according to a survey of credit card activity.

Worried about your retirement? Tell us your story To top of page

First Published: October 7, 2008: 10:51 AM ET

Business loan bailout

Federal Reserve to buy loans crucial to business to unfreeze markets.

By Chris Isidore, CNNMoney.com senior writer
Last Updated: October 7, 2008: 11:22 AM ET

NEW YORK (CNNMoney.com) -- The Federal Reserve announced a new program to help the battered market for short-term business loans - taking its closest step yet to lending directly to businesses.

The program addresses commercial paper, a form of short-term funding that is crucial to many businesses operations.

Commercial paper is sold by major corporations and most of the nation's leading financial institutions. They use the proceeds to fund day-to-day business operations. It is bought primarily by money market fund managers and other institutional investors.

Before the current credit crisis, there was nearly $2 trillion of commercial paper outstanding and was mostly issued for short terms - never more than nine months - and thus had to be renewed frequently.

For investors, it was considered a very safe investment to purchase and one that could be easily resold to other investors.

In the past month, the amount of money outstanding in commercial paper loans has fallen 11% to a seasonally adjusted $1.6 trillion on Oct. 1 from $1.82 trillion on Sept. 10.

The decline in available funding indicates only part of the market's problems, however. Investors have also become unwilling to buy longer-term paper - beyond a week or two - from even companies and financial institutions with top-flight credit ratings.

Federal Reserve officials speaking on background to reporters said that the overwhelming majority of the paper outstanding is coming up for renewal in the next several days and companies needing to use the money could face trouble when they try to renew it.

Experts in the field say the market really fell apart after Lehman Brothers, the nation's No. 4 Wall Street firm at the time, filed for bankruptcy on Sept. 15. The firm's collapse essentially wiped out the value of its commercial paper and scared money market managers out of the commercial paper market and into Treasurys.

Federal Reserve officials say they hope that the Fed's entry into the market will give money markets and other investors confidence to reenter the market because they know they will be able to sell that paper to the Fed as a backstop. So they hope the central bank will not have to actually buy much of the commercial paper in order to restore confidence in the market.

Fed officials said there is no limit to the amount of commercial paper it could buy. They said that market conditions - and the decisions of investors - will determine the extent to which the government will have to step in.

Many of the details of the program, including when it will be open for business, had not yet been settled as of Tuesday's announcement.

The Fed will buy only top-rated commercial paper, of which there was about $1.3 trillion outstanding in August. About $100 billion of that was in the form of unsecured loans to non-financial firms, and about $600 billion was to financial firms. The other approximately $600 billion is backed by assets at the firms issuing the paper, although that is generally considered unsecured lending as well.

Much of the commercial paper outstanding at the start of the credit crisis is now coming up for renewal,As a result, fears have grown that the market could drop even more sharply without some drastic improvement in the market.

Under the program announced Tuesday morning, the Fed will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The program is slated to expire in April 2009 and will have financial support from taxpayers.

"The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility," said the Fed's statement.

The new program comes as the Treasury Department scrambles to put in place a $700 billion bailout of the financial system enacted on Friday. Under that program, the Treasury is expected to purchase troubled assets from banks and financial institutions in an effort to spur more lending. To top of page

First Published: October 7, 2008: 9:19 AM ET

Bailout aimed at Wall Street - poll

CNN/Opinion Research survey shows only 40% of Americans think the $700 billion plan was aimed at helping Main Street.

By David Goldman, CNNMoney.com staff writer
October 7, 2008: 12:09 PM ET

NEW YORK (CNNMoney.com) -- The government said last week's $700 billion financial bailout was necessary to help Wall Street and Main Street alike, but most Americans don't think the plan was intended to benefit them, according to a survey released Tuesday.

In a CNN/Opinion Research Corp. poll, only 40% of Americans think the legislation was an attempt to rescue the economy in order to help ordinary taxpayers. Instead, 53% saw the bill as mostly a bailout for Wall Street.

Politicians said the bill was a last-resort move to thaw the frozen credit markets. They said the credit crunch could eventually hurt everyday Americans, because banks would not issue loans for cars, tuition or homes. Lawmakers said businesses would also be forced to cut payrolls, leaving hundreds of thousands more Americans out of work.

"By coming together on this legislation, we have acted boldly to prevent the crisis on Wall Street from becoming a crisis in communities across our country," President Bush said last week after the House voted 263 to 171 to pass the measure.

But taxpayers weren't buying it. The survey of more than 1,000 Americans, conducted Oct. 3-5, found that 59% thought the bill would treat taxpayers unfairly. Almost as many - 52% - thought the bill would waste money.

Many economists disagree, arguing that the government was the only buyer left who could help banks from dragging their anchor.

"If companies continue to write down loans, they take a hit to their capital, and they're going to make fewer loans in the future or charge a higher interest on loans that they do make," said John Silvia, chief economist at Wachovia. "Most Americans don't put the two together."

Still, taxpayers didn't think the bill was a good investment. Some 20% believed the government will not get back any of the $700 billion it plans to invest in troubled asset-backed securities, and about half of those surveyed thought the government would get only a little money back.

Just 25% said the Treasury would get most of its investment back, and only 4% said it would get it all back.

"At the end of the day, it's going to be an expensive plan, but the government had to step in," said Silvia. "It's a difficult thing to estimate, but the government could sell the assets at a decent price once the market's better."

Though skeptical, Americans were somewhat confident that the bill would do some good. Of those polled, 51% said they believed the legislation would help ordinary Americans who have mortgage problems keep their homes.

Congressional Democrats succeeded in amending the original Bush administration proposal by adding in provisions that support homeowners at risk of foreclosure, in part by giving the government more say in how loans for troubled borrowers are modified so people can stay in their homes. To top of page

Holiday job picture not so jolly

Despite the big shopping events coming up, store chains indicate that they aren't rushing into seasonal hiring.

By Parija B. Kavilanz, CNNMoney.com senior writer
October 7, 2008: 11:54 AM ET

NEW YORK (CNNMoney.com) -- Many Americans who are hoping to work in a store this holiday season could be in for a big disappointment.

Because of an ongoing sales slump and expectations for a dismal shopping season, analysts expect retail chains will cut back on hiring temporary workers.

"This could be the weakest holiday hiring season since 2001," said John Challenger, CEO of outplacement firm Challenger, Gray & Christmas. In 2001, the nation was emerging from a recession and still reeling from the September 11 attacks.

According to his firm's forecast, hiring for the October-December shopping months could fall well short of last year's 698,300 retail jobs.

That total, itself, was a 6.5% decline from the 2006 holiday season, according to the Bureau of Labor Statistics.

"[Retailers] are looking at a consumer that's tapped out and very worried about job security," Challenger said.

In this environment - with thousands losing their jobs and credit to buy merchandise difficult to get - stores themselves are looking at ways to cut costs.

"Seasonal hiring is one of the few controllable costs for retailers in the short run," said Carl Steidtmann, chief economist with Deloitte Research.

"We've noticed that our retail clients have delayed giving us their seasonal hire ads by a month," said Don Firth, president and CEO of AllRetailJobs.com, an online career and recruiting job board that specializes in retail jobs.

He said retailers started sending their ads to his Web site in October instead of in September, which is usually the case.

Judging by the volume of ads coming into his Web site from chains such as Best Buy, RadioShack and Wal-Mart, Firth thinks the level of temporary holiday hiring for the key shopping months could be in-line with or softer than last year.

Less help is a risky bet

Industry watchers expect merchants will push more business online this year and use temporary workers mostly for the weekend shopping rush.

Wal-Mart (WMT, Fortune 500), the world's largest retailer, anticipates hiring between 20,000 to 25,000 temporary holiday workers from October through December nationwide.

While Wal-Mart spokesman Greg Rossiter refused to say whether that number is more or less than last year, he said the company had set that level "against the backdrop of more efficient staffing."

"We obviously are trying to manage our costs and keep prices as low as possible," he said.

Discounter Target (TGT, Fortune 500) seems to be employing a similar strategy, although spokeswoman Laura Opsahl said the retailer would hire fewer workers in some markets as it "continues to experience soft sales."

"Yes, in some instances where we project [customer] traffic may be down, it could affect the number of [seasonal] hires from previous years," she said.

In 2007, Opsahl said Target hired 100,000 holiday workers for its U.S. stores.

Holiday workers, such as cashiers and customer service representatives, typically represent 10%-20% of department store operator J.C. Penney (JCP, Fortune 500)'s annual hiring. Penney spokesman Quinton Crenshaw said the retailer, too, was being cautious with its seasonal hiring.

"We expect to hire the same number as last year but we'll see what the requirements are based on customer traffic," Crenshaw said.

Electronics seller Best Buy (BBY, Fortune 500) also is taking a wait-and-see approach to its holiday hiring requirements.

"We're still determining the final details, but at this point we expect that the numbers may mirror last year's numbers of roughly 26,500 seasonal hires, but it might be slightly less," Dawn Bryant said in a e-mail to CNNMoney.com.

Howard Tubin, analyst with RBC Capital Markets, said less seasonal hiring could cut both ways for retailers in a difficult year.

"Retailers are trying to manage through a difficult situation," he said. "They don't want to hurt their business, but they also need to improve their sales."

That is where trimming temporary workers becomes a risky bet, given that customer service consistently ranks among the top things that attract and keep shoppers in a store, especially during the holiday shopping frenzy.

With fewer workers, consumers could have to wait longer at the checkout - and will simply opt to shop elsewhere, or not at all.

"Retailers are caught between a rock and a hard place," said Challenger.

And the hard times for stores and would-be workers are likely to spill over into next year, said Deloitte Research's Steidtmann.

"Next year, retailers will continue to be parsimonious in terms of costs," he said. "We will see many store closings, and retail employment will continue to contract."

Credit crunch: Not so happy holidays

Jobs: Worst in 5 years

Wal-Mart cuts prices on toys To top of page


Oil prices rebound

Crude recovers as investors remain wary of global economic sluggishness and weak demand. Dollar's retreat adds support.

By Ben Rooney, CNNMoney.com staff writer
October 7, 2008: 12:16 PM ET

NEW YORK (CNNMoney.com) -- The price of oil regained some ground Tuesday, after plunging to an 8-month low in the previous session, as investors weighed a weaker dollar against global economic weakness and signs of diminished demand for oil and gas.

Light, sweet crude rose $2 to $89.81 a barrel on the New York Mercantile Exchange. On Monday, oil tumbled $6 to settle below $88 a barrel for the first time since Feb. 6.

"Today's trade will focus on the latest developments in the credit crisis and on the reaction of global stock markets to them," Tom Pawlicki, an oil industry analyst at MF Global,wrote in a note to clients.

Global equity markets tumbled Monday after German finance ministers organized the bailout of a major real estate lender and a number of European governments announced plans to guarantee commercial and individual bank accounts.

But overseas markets were mixed Tuesday. London's FTSE 100 exchange and France's CAC 40 both rose moderately while the German DAX tumbled more than 1%. Japan's Nikkei slid 3%.

Pawlicki said the oil market was caught off-guard by the severity of the economic crisis developing in Europe. He said it was particularly surprising in light of the U.S. government's passage of a $700 billion bailout plan last week.

The historic intervention is aimed at reestablishing confidence in the financial markets with the goal of eventually stabilizing the broader economy. But the plan has met with some skepticism by market pros who say it will take time to implement and that it may not be enough.

"We had thought that passage would have brought a relief rally to the stock and energy markets that could have lasted several days," Pawlicki said. "It's likely that today's trade will follow-through to the downside."

Dollar softens. Tuesday's rebound in the price of oil came as the U.S. dollar fell against its major trading partners.

The price of oil often climbs when the dollar weakens because many investors buy oil and other commodities as a hedge against inflation. And a less robust buck makes oil, which is priced in dollars, more of a bargain for overseas buyers.

The greenback had rallied against the euro and the pound recently amid a spate of near bank failures and government bailouts in Europe. But the dollar was pushed lower Tuesday as currency markets appeared to bet that the Federal Reserve will lower interest rates soon.

On the Chicago Board of Trade, futures indicated a 48% chance that the Fed will lower its rate a half point to 1.5% from 2% when it meets on Oct. 29. Futures showed a 58% chance that the rate will be cut to 1.25%.

Many investors believe that the central bank could cut rates sooner.

The Fed announced plans Tuesday to backstop the commercial paper market, a lending market that businesses use to get loans for everyday activities, by purchasing companies' short-term debt.

Lower interest rates can help boost economic activity by making it easier for business to borrow money. But they can also fuel inflation and undermine a currency.

Gasoline. Prices at the pump fell Tuesday and experts expect them to continue to come down.

The national average price for a gallon of regular, unleaded gasoline fell 2.4 cents to $3.480 from $3.504, according to a daily survey released Tuesday by the American Automobile Association. That's down 18% from an all-time high of $4.114 a gallon hit on July 17.

Analysts say the retreat in oil prices and a recovery in refining capacity in the Gulf Coast following recent storm damage could continue to push gas prices down to $3 a gallon in the next few weeks. To top of page


Heat costs going up this winter

Despite recent price slumps, government warns of spike in energy prices, especially fuel oil.

October 7, 2008: 9:09 AM ET

WASHINGTON (AP) -- Although global oil prices have plummeted, the cost of heating your home this winter will be a lot more expensive, especially for households that depend on fuel oil, the Energy Department predicted Tuesday.

Households that use fuel oil can expect to spend an average of $2,388 - or $449 more than last year - for the October-April heating season. Users of natural gas will pay less than half that, $1,010 on average, still $155 more than last year.

The department's Energy Information Administration emphasized that the cost figures should be viewed as "a broad guide" comparing this year's expected heating costs to last winter and said actual expenses can vary depending on region, local weather and the energy efficiency of individual homes.

Higher costs all around

But across the board, whether one uses heating oil, natural gas, propane or electricity, costs will be higher, said the agency.

Users of electricity to heat homes will see the smallest increase, about 10% on average, followed by propane, 11%; natural gas, which is used in more than half of the nation's homes, 18%; and heating oil, used widely in the Northeast, 23%.

That's not good news for a country where people have been reeling from a summer of record $4-a-gallon gasoline, a booming credit crisis and a struggling economy.

Increase in shutoffs

Energy experts say some people have yet to pay last winter's heating bills or the summer's air conditioning costs. A recent Associated Press survey found that utility shutoffs because of unpaid bills have been running 17% to 22% higher than last year in some parts of the country.

The Energy Department said it expects the price of fuel oil will average $3.90 a gallon, 60 cents more than last winter.

While the cost of crude oil has declined from a high of $147 a barrel in July to just under $88 a barrel for delivery in November, the department said "oil markets are expected to remain relatively tight because of sluggish production growth." Barring a worse-than-expected global economic decline, prices are likely to edge back up to about $112 a barrel, the agency said.

Partly because of refinery shutdowns caused by the two recent Gulf coast hurricanes, distillate inventories - fuel oil and diesel - are expected to be lower going into the heating season than last year, said the agency. Fuel oil is used by about 7% of the nation's households.

Natural gas supplies will be plentiful this winter, with storage in November expected to be well above the five-year average, the gas supply industry said earlier this week. And wholesale gas prices have dropped to nearly where they were a year ago after soaring this summer.

Record-high natural gas

Still, the retail cost of natural gas for heating is expected to be 18% higher this winter.

"Much of the natural gas utilities will deliver to households this year was purchased when prices were at or near these historic highs," said Chris McGill of the American Gas Association, which represents 202 local natural gas utilities across the country. That higher price will, for the most part, be passed on.

Meanwhile, people are using much less oil this year because of high prices at the gasoline pumps and the weakening economy, the Energy Department said.

Total U.S. petroleum consumption this year is expected to average 19.8 million barrels a day, or 830,000 barrels fewer than in 2007, followed by a further 100,000-barrel-a-day decline expected in 2009, according to the EIA report.

On the other hand, the agency said, domestic oil production this year will drop below an average of 5 million barrels a day for the first time since 1946 because of declining fields and the disruptions caused in the Gulf of Mexico by Hurricanes Ike and Gustav. To top of page

Markets mixed in volatile trade

World stock markets have been volatile in Tuesday trading as investors continued to worry over the strength of financial institutions.

London's FTSE 100 index rallied despite banking shares taking a hammering - HBOS and Royal Bank of Scotland both losing more than 30%.

Having shed 7.8% on Monday, the key London index closed up 0.35%. France's Cac 40 index ended 0.55% higher.

In choppy morning trading on Wall Street, the Dow Jones was down 1%.

The other main US index, the Nasdaq, was 1.5% lower.

Earlier, Asian markets had been mixed as traders reacted to the turmoil.

Japan's Nikkei 225 index sank more than 5% - below the 10,000-point barrier - before recovering slightly to close down 3%.

However, Australia's financial markets rallied after the country's central bank cut its official interest rate from 7% to 6%.

'Recession arrived'


A shortage of capital is a big issue for banks...but the really big issue is the breakdown of wholesale markets
Robert Peston
BBC business editor

The market moves came amid developments including:

  • President George W Bush discussed the global economic crisis with Britain's Gordon Brown, France's Nicolas Sarkozy and Italy's Silvio Berlusconi, a White House spokeswoman said
  • Netherlands trebled the amount of savers' deposits it will protect to 100,000 euros (£77,700; $136,776)
  • European Union finance ministers agreed to increase the guarantee for customers' bank savings accounts to at least 50,000 euros
  • Taiwan said that it would fully protect depositors' savings should a bank fail
  • The US Federal Reserve announced plans to buy massive amounts of short-term debt from companies in an effort to unfreeze the money markets
  • The Icelandic government took control of the country's second biggest bank, Landsbanki, which owns UK internet bank Icesave
  • The British Chamber of Commerce said that the UK was already in recession
  • The BBC's business editor Robert Peston learned that a trio of leading UK banks had met with Chancellor Alistair Darling and told him they were disappointed he had not presented a fully elaborated banking rescue plan
  • Australia's central bank trimmed interest rates from 7% to 6% - despite inflation being well ahead of government targets
  • Moscow's two main stock exchanges opened several hours late on Tuesday having had suffered heavy losses on Monday.

    • In a volatile day in London, the FTSE 100 index closed 16 points higher at 4,605.22 in late afternoon trading.

    Its 391-point drop on Monday had already wiped £93bn from the value of London's leading shares.

    France's Cac 40 index, which lost more than 9% in the previous session, surrendered some of its early gains, but closed 20.24 points ahead at 3,732.22, while Germany's Dax index fell 1.12% to 5,326.63 points.

    On Wall Street, the Dow Jones index, which had lost 370 points on Monday, shed a further 108 points to 9,846.

    Earlier, Japan's Nikkei index lost 317.2 points to end at 10,155, while Hong Kong's Hang Seng index finished 5% lower.

    Are you concerned about the global economic crisis? What questions would you like to ask the experts? Send us your questions using the form below?

    Credit crisis: World in turmoil

    As global markets fall sharply, the BBC News website looks at some of the countries affected by financial turmoil and what their governments are doing to alleviate the crisis.

    GERMANY

    State-owned savings banks in Germany reported a flood of new deposits as people look for safer accounts which are insured for 100% of their value.

    The country's second-biggest commercial property lender, Hypo Real Estate, was threatened with collapse last week after incurring large amounts of bad debt.

    The government attempted a bail-out, only for it to collapse on Sunday after a banking consortium withdrew support for the deal. A new bail-out was arranged with guarantees of 50bn euros ($68bn; £38.7bn), 15bn euros more than the first rescue attempt.

    The German government has also announced what appear to be unlimited guarantees for private savings. However, it said there would be no legislation to give extra protection to savers.

    Chancellor Angela Merkel said those financiers who did "irresponsible business" would be made accountable.

    ICELAND

    The Prime Minister of Iceland, Geir Haarde, has confirmed that negotiations have been going on with Russia for a big loan to support Iceland's banking system.

    Mr Haarde said a delegation from Iceland would go to Moscow in the next couple of days to finalise the deal. He thanked Moscow for its offer of more than $5bn in emergency loans.

    Iceland's government has taken control of Landsbanki, the second largest bank by value, and has dismissed the board of directors.

    The bank, which also trades as the internet bank Icesave, is being taken over by the Icelandic Financial Supervisory Authority (IFSA).

    Customers of the Icesave have been warned they will probably have to claim compensation for money held in their savings accounts.

    Iceland's parliament has passed emergency legislation giving the government wide-ranging powers to dictate banks' operations.

    Mr Haarde said the legislation would help the island avoid national bankruptcy.

    Iceland will also offer an unlimited guarantee for all savings accounts.

    The Icelandic krona plummeted against the dollar after the government nationalised the country's third-largest bank, Glitnir, last week. By Friday it had lost one-fifth of its value.

    The government has agreed measures allowing the banks to sell off some foreign assets to help shore up the financial system.

    Trading on Iceland's stock exchange remains suspended for the second day running.

    BELGIUM

    The Belgian government has agreed to guarantee bank deposits of up to 100,000 euros ($136,000) - an increase of 80,000 euros.

    The country's largest banking group, Fortis, has been in difficulty since it joined two other banks to purchase the Dutch bank ABN Amro, just before the global financial crisis began.

    After several failed bail-out attempts, French giant BNP Paribas agreed to buy 75% of Fortis's operations in Belgium and Luxembourg. The two governments will take a minority share of the company, while its Netherlands operation has been nationalised.

    IRELAND

    Ireland was the first government to come to the rescue of its citizens' savings, promising on 30 September to guarantee all deposits, bonds and debts in its six main banks for two years.

    The move initially prompted consternation among some European partners, but several countries have since followed suit.

    UK

    Prime Minister Gordon Brown is holding talks with Bank of England Governor Mervyn King on proposals to stabilise the banking system.

    UK banking shares have plunged and there are fears that more financial institutions may need government assistance.

    HBOS dropped 42%, Royal Bank of Scotland (RBS) fell 39%, Barclays shed 9% and Lloyds TSB was down 13%.

    The British Chambers of Commerce (BCC) has warned that Britain is already in a recession, which is worsening and could see unemployment rise by 350,000 by next year.

    The UK government increased its guarantee to savers from £35,000 ($62,000) to £50,000 from Tuesday.

    The Treasury is said to be considering buying large stakes in Britain's banks to encourage lending. The Northern Rock bank and the mortgage lender Bradford & Bingley have already been nationalised, and two other large groups, HBOS and Lloyds TSB, are to merge.

    SPAIN

    Spanish Prime Minister Jose Luis Rodriguez Zapatero on Tuesday increased bank deposit guarantees to 100,000 euros ($136,000) from the current 20,000 euros.

    Mr Zapatero told leading banks that the government would take immediate steps to increase deposit guarantees to boost confidence in the financial system.

    Spain has been calling for a joint European initiative to tackle the world financial crisis.

    NETHERLANDS

    The Netherlands trebled the amount of savers' deposits it will protect to 100,000 euros (£77,700; $136,776).

    GREECE

    The Greek government said on Friday it would fully guarantee all bank deposits of citizens, but an official added that this was a "political commitment" and the banking system was not at risk.

    DENMARK

    The Danish government and banks on Sunday agreed a crisis plan which removes the ceiling on savings deposit guarantees, to be funded partly by banks and partly by the taxpayer.

    RUSSIA

    President Dmitry Medvedev announced 950 billion roubles ($36.4 bn) of long term help for banks at an emergency Kremlin meeting on Tuesday.

    Russia's two leading stock exchanges were forced to close for several hours, one day after suffering massive falls in value.

    Trading on the RTS and Micex bourses was postponed by the country's financial regulator after stocks lost nearly 20% of their value on Monday.

    Soon after reopening, the RTS index rose by 0.58% while Micex gained 2.16%. Russian President Dmitry Medvedev called for urgent international measures to combat the global financial crisis in a statement.

    "The crisis of the international financial system demands urgent joint action. It's absolutely obvious the time has come for new decisions," said Mr Medvedev.

    AUSTRALIA

    Australia's central bank has cut its key interest rate from 7% to 6% - a much bigger-than-expected reduction.

    The Reserve Bank of Australia said that the sharp cut was justified given the prospects for growth, even though inflation is currently above target.

    Prime Minister Kevin Rudd said the move would maintain financial stability and help Australia in "tough times ahead".

    The cut, the bank's largest since May 1992, was well received by investors and the stock market rallied.

    Observers had only expected the rate to be cut to 6.5%.

    JAPAN

    Japanese shares dropped to their lowest level in almost five years amid growing fears over the widening financial crisis.

    SAUDI ARABIA

    Shares in Saudi Arabia lost about 8% of their value for the second consecutive day.

    Analysts said there was panic in the markets, with investors concerned about the future for banks, and companies exposed to a faltering property market.

    The Saudi stock market, the Arab world's largest, has now lost more than 40% of its value this year.

    EGYPT

    Egypt's main index dropped by more than 16% to its lowest level in two years.

    Egypt's stock market has halved in value since May 2008.

    Bank shares take a big pounding


    UK banking shares have plunged on fears that more financial institutions may need government assistance.

    HBOS dropped 42%, Royal Bank of Scotland (RBS) fell 39%, Barclays shed 9% and Lloyds TSB was down 13%.

    The bosses of the UK's biggest banks met Chancellor Alistair Darling to discuss financing late on Monday, BBC business editor Robert Peston said.

    The Prime Minister, the chancellor and the Bank of England governor are meeting to discuss the crisis.

    The chairman of the Financial Services Authority, Lord Turner, is also taking part in the talks, which will consider government proposals for stabilising the financial system and longer-term reform.

    Downing Street denied it was an "emergency meeting", adding that it would focus on "ongoing action".

    Capital

    Barclays has categorically denied that it has requested any capital from the UK government.

    RBS confirmed that the meeting with Mr Darling had taken place, but blamed the share price fall on two very large share trades taking place, which under stock market rules meant that the shares were temporarily suspended.

    Lloyds TSB has declined to comment.

    The Treasury said it did not comment on whether or not meetings were taking place.

    Rescue plan

    Monday's meeting was attended by Mr Darling together with Mervyn King, the governor of the Bank of England, and Adair Turner, the chairman of the Financial Services Authority.



    What the Irish government did, in guaranteeing both retail and wholesale deposits in their banks, may turn out to be something of a model for Europe-wide action

    Robert Peston, BBC Business editor

    Representing banks were the chief executives of RBS, Barclays and Lloyds TSB.

    The Treasury is understood to have been formulating a plan that would allow the government to provide extra funding to the banks in exchange for stakes in them.

    The government said it would not speculate about what policy options are being considered, but repeated Mr Darling's assurances from Monday.

    "As the chancellor said yesterday, we will do whatever it takes to maintain stability and support a well-functioning banking system," a Treasury spokesman said.

    'Get on with it'

    But some experienced politicians were convinced that there must be action this week.

    "The government will inevitably have to recapitalise the banks," Geoffrey Robinson MP, and former Labour paymaster general, told the BBC.

    "They really have to recapitalise them this week," agreed Sir Kenneth Clarke MP, former Conservative chancellor of the exchequer.

    "Everyone knows they're going to have to do it - get on with it," he added.

    Lending problems

    Also depressing shares in RBS, which owns NatWest bank, was Monday's news that the ratings agency S&P has downgraded it, which means that the raters think it is a less safe institution to lend money to.

    That is a particular problem, because it is the difficulty banks are having in borrowing money from each other that is at the root of the credit crunch.



    As they have been unable to borrow from each other, the banks have been forced to borrow from the government instead, to the tune of £200bn over the past year, Robert Peston said.

    It has been another tough day for banks elsewhere in Europe, with the government of Iceland taking control of the country's second-biggest bank, Landsbanki.

    Landsbanki owns the internet bank Icesave, which has stopped allowing customers to withdraw money. Icesave is thought to have 350,000 customers in the UK and Netherlands.

    Summit

    Finance ministers meeting in Luxembourg have agreed to increase the minimum value of deposits that European countries will have to guarantee from 20,000 euros to 50,000 euros ($68,250; £38,900).

    At the moment in the UK, the Financial Services Compensation Scheme (FSCS) guarantees the first £50,000, but European banks operating in the UK are guaranteed by their domestic scheme.

    Some of them choose to top up the protection with the FSCS, so if Landsbanki were to fail, the first 50,000 euros would be paid by the Icelandic authorities and any more up to £50,000 would be paid by the FCSC, which would also handle all the paperwork.

    All this comes the day before the Bank of England begins its latest two-day monthly interest rate-setting meeting, at which it is widely expected to cut interest rates from the current 5%.

    Icesave savers warned on accounts

    Please turn on JavaScript. Media requires JavaScript to play.

    Geir Haarde says he is sending people to Moscow to hold talks over a loan

    Customers of the Icesave internet bank have been warned they will probably have to claim compensation for money held in their savings accounts.

    The authorities in the UK are preparing for the bank's parent in Iceland, Landsbanki, to be declared insolvent.

    The Icelandic government took control of the country's second biggest bank on Tuesday to keep it afloat.

    Claims from Icesave's UK customers will be handled by the Financial Services Compensation Scheme (FSCS).

    Halldor J Kristjansson, the new manager of Landsbanki, said it had not helped that customers in Britain wanted to take out a large chunk of money after the news broke about the nationalisation of Glitnir, the third largest Icelandic bank last week.

    "There is always a certain danger that there will be large withdrawl of savings and that by itself created additional problems on top of everything else, there are so many intervowen factors but that wasn't the main problem although it is very big," he said.

    Restructuring work

    Under the depositor protection arrangements in Iceland and the UK, the Icelandic authorities will be liable for the first 20,887 euros (£16,300) of compensation.


    		We are gearing up to be ready to do whatever we can in order to get compensation back to UK savers as quickly as possible
    FSCS spokesman

    The UK's FCSC will pay out the rest of the claims, up to the newly introduced ceiling of £50,000 per person.

    "If, as expected, the Icelandic authorities put the firm into insolvency proceedings this would trigger a default under the FSCS," said the Financial Services Authority.

    "In this case, savers with Icesave could make a claim to get their money back," it said.

    Landsbanki later issued a statement saying it had gone into receivership, not liquidation, and that the Icelandic Financial Services Authority had appointed a receivership committee.

    "Work has already begun on the restructuring of the operations of Landsbanki," it said.

    A spokesman for the FSCS said that if Icesave were declared insolvent, UK customers would not have to make two separate claims and that it would probably handle all UK claims on one form.

    "We are working with the Icelandic authorities to confirm the procedure," a spokesman said.

    "We are gearing up to be ready to do whatever we can in order to get compensation back to UK savers as quickly as possible," he added.

    However during the morning the FSCS helpline collapsed.

    "We are doing everything we can to sort that out as quickly as we can," said a spokeswoman.

    "We are trying to get an alternative number installed."

    Insolvent

    The Financial Services Authority (FSA) said it was expecting Icesave's parent bank to be declared insolvent soon, following its takeover by the Icelandic Financial Supervisory Authority (IFSA).


    		I haven't slept for a couple of days. This was money put away for retirement
    Icesave customer Mike Davis

    Icesave has 350,000 savers in the UK and Netherlands, with about £4.5bn of deposits.

    It is not currently allowing customers to take money out of their accounts or to put in deposits.

    This dismayed customer Mike Davis, 62, who has £75,000 in retirement savings locked up in an Icesave account until 25 October.

    His daughter also has savings there and his partner, Pam Henson, 67, has £23,000 with the same bank.

    The couple are getting married on 1 November, and Mr Davis, who lives in Gloucestershire, said he was "shaking with worry" when he heard about problems with Icesave.

    "This cannot have come at a worse time. It is a pretty devastating blow," said Mr Davis, a landscape architect.

    "I haven't slept for a couple of days. This was money put away for retirement."

    He was expecting a long process of trying to recover savings and called for governments to guarantee 100% of savings.

    Emergency

    Landsbanki is the second Icelandic bank to be taken over to prevent a collapse of the country's banking system.


    		What we are doing here is saving a banking system
    Geir Haarde, Iceland's prime minister

    In an announcement on state radio, the commerce and banking minister Bjorgvin Sigurdsson said the board of directors of Landsbanki had been dismissed and the bank put into receivership.

    He said the state takeover was made "in co-operation" with Landsbanki and the bank would stay open and operate as normal.

    Glitnir, the country's third-largest bank, was nationalised last week to stop it being driven into bankruptcy by the international financial crisis.

    In a parallel move, Iceland's largest bank Kaupthing has been given a loan of 500m euros from the country's central bank.

    "The central bank of Iceland has provided Kaupthing with a 500m euro loan to facilitate operations, and Kaupthing is committed to working with the government to ensure regular workings of the Icelandic financial system," the bank said in a statement.

    Meanwhile the Icelandic government has asked Russia to give it a loan of 4bn euros lasting for three to four years, to strengthen its foreign exchange reserves.

    "The Russian Ambassador to Iceland, Victor I Tatarintsev, informed the chairman of the board of governors of the central bank of Iceland this morning that Russia would grant the central bank a loan in the amount of 4bn euros," said the bank in a statement.

    At first the Russian ministry of finance denied that any decision on giving a loan to Iceland had been made.

    Later the Russian finance minister, Alexei Kudrin, said: "We have a request from the Icelandic government to provide a loan. We view it positively. The result will be announced after negotiations."

    Continued operations

    On Monday the Icelandic government passed emergency legislation to try to rescue the country's banking system and avoid what Prime Minister Geir Haarde described as "national bankruptcy".

    This included an unlimited guarantee for all bank customers' savings accounts.

    "What we are doing here is saving a banking system - saving the domestic banking system - and making sure that it can function properly," he said after the decision to rescue Landsbanki.

    "And I think, also, through our declaration on domestic deposits in these banks and saving institutions, we have been able to avoid a run on the banks here, and therefore prevent it," he added.

    The website of Icesave tells customers that: "We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts.

    "We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly," it adds.

    A spokeswoman for the bank said the website was not operating "due to technical difficulties", but did not offer any further reason for it being down.

    Explaining its action in taking over Landsbanki, the IFSA said: "Based on new legislation, the Icelandic Financial Supervisory Authority (IFSA) proceeds to take control of Landsbanki to ensure continued commercial bank operations in Iceland.

    "Domestic deposits are fully guaranteed, as declared by the government.

    "Landsbanki's domestic branches, call centres, cash machines and internet operations will be open for business as usual," it added.

    Rescue plan due in hours

    • Robert Peston
    • 7 Oct 08, 06:47 PM

    The Government is poised to announce details of a comprehensive rescue package for the banking system.

    It will include a proposal to inject capital into banks and to provide a standby facility to ensure our big banks have enough cash to fund their day-to-day operations.

    In a UK context, this is a very big moment.

    It is the government's attempt to stabilise our banking system.

    I'll file more as and when I have more detail.


    Banks' most pressing problem

    • Robert Peston
    • 7 Oct 08, 10:02 AM

    A shortage of capital is a big issue for banks, as I've been blathering on about for days (and see my note of this morning on our banks' meeting with the chancellor and request for a capital injection from taxpayers).

    Man watching share price on screenBut the really urgent issue is the breakdown of wholesale markets, and the increasing difficulty that almost all banks are having in funding themselves on a day-to-day basis.

    The basic problem is that the collapses of Lehman and Washington Mutual have made all financial institutions wary of lending to any bank where there is even a scintilla of risk.

    It turns out, therefore, that Hank Paulson and the US Treasury were probably wrong in allowing them to fail.

    But that's spilt milk.

    The more important point is that, across the globe, there are very few banks that are finding it easy to raise money from wholesale sources.

    In other words, all this fuss about insuring retail deposits is beside the point.

    We all know that governments won't allow retail depositors to lose money - so that's not something to worry about.

    A far bigger concern is that most banks are suffering a progressive erosion of the money they receive from other financial institutions.

    To date, that's been replaced by colossal loans from the authorities.

    In the case of the UK, the Bank of England and the Treasury have collectively provided well over £200bn of incremental lending to our banks over the past year.

    It's what I've described as nationalisation by stealth.

    But all governments will probably need to do more.

    What the Irish government did, in guaranteeing both retail and wholesale deposits in their banks, may turn out to be something of a model for Europe-wide action.

    What we may need is a cast-iron pledge from all European governments that they will fill whatever funding gaps emerge at their respective banks from the seizing up of money markets.

    It's probably the best outcome that can emerge from today's meeting of European finance ministers.

    Bankers all across Europe are watching this meeting, and keeping their fingers and toes crossed, that the finance ministers understand how fragile they are - and that the finance ministers will pledge to keep them afloat, whatever the apparent strain on public-sector balance sheets.


    Banks ask chancellor for capital

    • Robert Peston
    • 7 Oct 08, 07:00 AM

    When Treasury officials started working overtime last week on an emergency plan to inject new capital provided by taxpayers into our banks, the chancellor wasn't sure how our banks would react.

    Would they proudly tell him to hop off?

    Or would they put out the begging bowl?

    Alistair DarlingWell last night a trio of the UK's biggest banks - Royal Bank of Scotland, Barclays, and Lloyds TSB - signalled to Alistair Darling that they'd like to see the colour of taxpayers' money rather quicker than he might have expected.

    According to bankers, these three were disappointed that at a private meeting last night with Darling, held at his request, he didn't present to them a fully elaborated banking rescue plan.

    One banker told me that what he called the Gang of Three of Barclays, RBS and Lloyds TSB told Darling to pull his finger out and finalise whatever it is he's eventually prepared to offer on taxpayers' behalf.

    On paper, Lloyds TSB, RBS and Barclays don't have a pressing need for additional capital.

    But they have become concerned that they are being weakened significantly by investors' perception that they are short of capital and their balance sheets need to be strengthened.

    Also at the meeting were Mervyn King, Governor of the Bank of England, and Adair Turner, chairman of the Financial Services Authority.

    And although the other big banks were represented, it was the chief executives of Lloyds TSB, Royal Bank of Scotland and Barclays - respectively Eric Daniels, Sir Fred Goodwin and John Varley - who formed a tightly-knit caucus and gave urgent focus to the discussion.

    The three banks estimate that they may need around £15bn of new capital each, with £7.5bn paid up front and a further £7.5bn guaranteed by the Treasury that would be delivered if it became necessary.

    Current rough estimates are that the capital injection could be as much as £50bn in total for all British banks.

    As yet however, there has not been any detailed negotiation with the Treasury on the amount of taxpayers' money that may be invested in them.

    There is no precedent in the UK for taxpayers to take such significant stakes in banks.

    The Treasury has been working on a rescue plan along those lines, as I disclosed in my note on Saturday.

    The three chief executives will talk again today, so that they can establish a common position, in advance of any further negotiations with the Treasury on a rescue package.

    The Treasury's current thinking is that it would acquire preferred stock in the banks, that wouldn't carry voting rights. But it would also take warrants over the ordinary shares, which is a device for ensuring that taxpayers would benefit if the banks' share prices were to rise.

    However, the chief executives also told Darling that a capital injection of this sort would not be enough to stabilise the banking system.

    The steady withdrawal of funds by other financial institutions, the collapse of the wholesale funding market, remains a serious problem - which probably can't be solved by the Bank of England continuing to provide ever greater loans against an ever wider range of collateral.

    In the next couple of years, many tens of billions of pounds of asset-backed securities have to be paid off or redeemed by British banks. So the banks want a commitment from the government that it will lend to them, whether or not they have collateral of the sort demanded by the Bank of England, to allow them to redeem these bonds.

    The banks are not looking for a formal guarantee from the Treasury that it will protect wholesale depositors, which is what the Irish government gave to Irish banks, but they would like a formal pledge that it will fill any funding gap created by the steady ebbing away of wholesale funding

    If such a commitment were not forthcoming, confidence in one or more British banks may continue to ebb away, to a potentially lethal extent - or so the banks fear.


    Monday's Picks

    How close to capitulation?

    • Robert Peston
    • 6 Oct 08, 03:47 PM

    Blimey it must be serious.

    Trader watching screens at London Stock ExchangeEvery European Union leader has signed up to the following statement:

    "All the leaders of the European Union make clear that each of them will take whatever measures are necessary to maintain the stability of the financial system - whether through liquidity support through central banks, action to deal with individual banks or enhanced depositor protection schemes.

    "While no depositors in our countries' banks have lost any money, we will continue to take the necessary measures to protect both the system and individual depositors. In taking these measures, European leaders acknowledge the need for close coordination and cooperation."

    So the mayhem of uncoordinated statements and actions over the past few days by the governments of Germany, Denmark, Sweden, Ireland and Greece was simply an accident.

    They're all back on the same hymn-sheet today.

    Investors seem underwhelmed: the FTSE 100 index is tumbling and shares are currently almost 8% lower.

    If sustained this would make it the third worst fall in the history of the FTSE 100 index.

    Does this mean we're close to that fabled moment in stock markets - the point of capitulation - when investors lose all hope and dump their stock at any price?

    According to the theory, there can be no sustained recovery until the markets are in the clutches of utter despair.

    Not everyone subscribes to the pseudo-economic psycho-babble.

    But it certainly looks hairy out there.

    UPDATE 17:35PM:

    Today was when no one could be under any illusion that the global banking crisis is primarily a North American phenomenon.

    There's a mess in Europe too, because European banks were also seduced over the preceding few years into lending too much to cheaply to consumers and businesses.

    In the past 24 hours, we've seen bank rescues in Belgium, Luxembourg and Germany, and an attempted rescue of an entire economy, that of Iceland.

    We've also had the worrying spectacle of apparent disunity among the governments of Europe, with Germany, Denmark, Sweden and Spain all taking unilateral steps to reassure their savers - which risked destabilising banks in other countries.

    And when EU government heads then issued an emergency joint statement promising to collaborate more closely, curiously that served to spook investors even more - presumably because it underlined the fragility of the banking system.

    What's also prompted high anxiety among investors and bankers is the mounting evidence that the crisis in financial markets is causing a severe economic slowdown.

    And when there's a collision of a financial and economic downturn, well the consequence can be painful - because rising unemployment leads to more loans going bad which further weakens our banks.

    So the chancellor's plan to strengthen our banks by injecting taxpayers money in the form of new capital is also an economic recovery plan.


    What the Germans did

    • Robert Peston
    • 6 Oct 08, 10:27 AM

    It gets weirder.

    Angela MerkelMy official sources tell me that the German government is not legislating to formally increase protection for savers.

    What Angela Merkel did, they say, was give a "political" commitment that no German savers would lose a penny - which is more-or-less identical to the commitment given by our Chancellor of the Exchequer, Alistair Darling

    But the horse has already bolted - in that this morning the Danes have given an unlimited guarantee to their savers and the Swedes have massively increased the level of protection they offer.

    Whether the German or British governments like it, there does appear to be a clear trend towards almost total protection for European retail depositors.


    Monday morning feeling

    • Robert Peston
    • 6 Oct 08, 07:20 AM

    Welcome to another anxious Monday morning.

    Branch of Hypo Real EstateMoney markets are deeply stressed again, with the Asian rates for lending between banks for three months remaining at their highest level since last December.

    Asian stock markets are falling, with Japan down 5%.

    And it's the troubles of Europe's banks, and the messy response of the authorities, that's to blame.

    First, let's accentuate the positive.

    Fortis's Belgian and Luxembourg operations have been bought - and effectively rescued - by the mighty BNP Paribas of France for just under £12bn in shares and cash.

    The troubled German property lender, Hypo Real Estate, has been rescued for the second time in a week, with a package of loans provided by the government in partnership with a consortium of banks and insurers.

    And the UK seems to have moved a step closer to announcing the details of a contingency plan being worked on in the Treasury (which I described in my note on Saturday) to inject billions of precious new capital into British banks.

    So far, so reassuring.

    But.

    We still don't know how and what the Icelandic government will do to restore confidence in its banking system.

    There's talk of a great national effort, or the use of its citizens' £8bn of pension savings to provide financial support to banks that may need it.

    But as of now, it's unclear what Iceland will attempt to do to stem the flight out of its currency and shore up banks that have borrowed £80bn in foreign currencies (and see my other Saturday note, "Markets call time on Iceland").

    Finally, there's the residual uncertainty about the extent of Germany's guarantee to holders of private accounts.

    It certainly looks as though it's providing 100% insurance to £450bn of deposits. Which seems fairly ambitious, and will put pressure on the UK government to do something similar.

    But here's the thing: retail deposits in the UK are much greater than that, some £950bn, according to an analysis by the City watchdog, the Financial Services Authority.

    In other words, we in the UK appear to hold more of our savings in authorised banks than seems to be the case in Germany.

    So for the UK to offer 100% protection would put a proportionately great strain on the public sector's balance sheet.


    Sunday's Picks

    German guarantee lost in translation

    • Robert Peston
    • 5 Oct 08, 08:35 PM

    I don't now expect an immediate decision by the Chancellor of the Exchequer to follow the example of the Germans and offer a full 100% guarantee to protect the savings of ordinary retail savers.

    Why not?

    Well Alistair Darling and the Treasury can't get any sense out of the German government about what it is precisely that they are doing.

    So there's no point in responding to something that's still a touch ephemeral.

    There are two possibilities.

    The German Chancellor, Angela Merkel, may be saying that the full financial might of the German state is guaranteeing or underwiting the retail liabilities of German banks - and thus bringing hundreds of billions of additional debt on to the public sector balance sheet.

    That's certainly what's implied in briefings by the German finance ministry. And if that's what's happening, it will reverberate all over Europe.

    It is the kind of commitment that would at a stroke strengten German banks in the eyes of their creditors.

    And if there weren't to be an ebbing away of deposits from British banks, our chancellor and prime minister would have to respond in kind - at the cost of a massive increment to our national debt.

    But it is theoretically possible that Angela Merkel thinks she is simply saying what Alistair Darling said at the height of the Northern Rock crisis a year ago, and repeated last week - which is that she's prepared to do whatever it takes to protect the savings of German retail depositors.

    That's a rather softer promise, which wouldn't lead to a swelling of the German national debt.

    One thing, and one thing alone is crystal clear: European governments are as dazed and confused by the mayhem in the global banking system as most of the rest of us.

    So they shouldn't be surprised if money markets open tomorrow even more stressed than they have been of late.

    After all it's been another weekend of attempted rescues of banks from Iceland, to Germany, Luxembourg, Belgium and Italy.

    Fingers crossed all the relevant battered banks - or in the case of Iceland, a battered economy - have had the salve and plasters attached by dawn.


    Full deposit protection is nigh

    • Robert Peston
    • 5 Oct 08, 05:04 PM

    The decision by the German federal government to guarantee all private savings in German banks is momentous.

    In a globalised banking market, in which money can leak across borders like a sieve, it will be almost impossible for the UK not to follow Germany's lead.

    I would be immensely surprised if Alistair Darling, the Chancellor of the Exchequer, didn't announce a similar commitment within the next 24 hours.

    The formalisation of full protection for depositors throughout the European Union became almost inevitable after similar decisions were taken over the past few days by the Irish and Greek governments.

    But Germany is the biggest economy in Europe, a global powerhouse, with a banking sector that for years prided itself on its conservativism.

    That Germany is the first of the major European economies to provide 100 per cent insurance to private savers shows just how fragile its banks have become.

    The trigger for the announcement seems to have been the desperate straits of Hypo Real Estate, the commercial property lender whose rescue in jeopardy.

    But that's only the trigger.

    The underlying cause is a near-total collapse of confidence by creditors to banks and by bankers themselves.

    Update 19:16

    What an unfortunate mess. Just hours after leaders of the UK, Germany, France and Italy promised to co-ordinate their responses to the global banking crisis, Germany seems to have struck out on its own - by offering 100 per cent state-backed insurance to the country's private savers.

    The German initiative - which is long on resonance and worryingly short on detail - caught the British Government off guard. The UK Treasury wasn't expecting any such drastic attempt to shore up confidence in Germany's banks.

    And although official statements from the German government are unambiguous that savers money will be fully protected by the state, there's a disturbing lack of detail about precisely how this guarantee would work.

    For example, it's not clear whether this is a formal, unambiguous commitment to take the retail liabilities of the German banks on to the public sector's balance sheet - a commitment would add many hundreds of billions of euros to Germany's national debt.

    Also, to add an almost comic element to Germany's evasive action, almost simultaneously there's been a statement by the EU Competition Commissioner Neelie Kroes that blanket guarantees on bank deposits by individual members states are "discriminatory".

    Kroes added that she was hopeful that Ireland's controversial 100 per cent guarantee - launched last week - would be modifiedn in "a form for which we can together state that it is line with the treaty".

    At a time when there's profound unease across Europe about the safety and security of our banks, the spectacle of governments seemingly at odds with each other and with the Commission is unsettling, to put it mildly.


    Saturday's Picks

    How to solve the crisis

    • Robert Peston
    • 4 Oct 08, 04:22 PM

    It's into the dangerous land of hubris that I'm going to stray today.

    I have a plan (perhaps better than a Baldrick-style cunning one) that might just ease the credit-crunch pressure in the UK and help to fill the UK's yawning pensions hole, the humungous gap between what we as a nation save for retirement and what we should be saving.

    This first bit is not my plan, but part of the Treasury's contingency preparation for the moment we reach Defcon 1 in the financial crisis (if we reach Defcon 1).

    What's being considered by Chancellor and Prime Minister is that the public sector would inject new capital into our battered banks, to strengthen their balance sheets, and provide them with the muscle to start lending in a sensible way again.

    And I'm told that their officials and advisers have sensibly learned a thing or two from the world's greatest investor, Warren Buffett, who recently bailed out Goldman Sachs with an injection of $5bn.

    For this succour, Buffett received preferred stock paying a fat dividend of 10 per cent and warrants to buy a further $5bn of common stock at below the prevailing Goldman share price.

    In other words he was being handsomely rewarded for providing Goldman with the resources to weather the storm and rebuild.

    Which is arguably what we as taxpayers should receive as our just deserts, if the Prime Minister were to issue the call to arms, in a financial sense, and decided to inject billions of our cash into banks.

    We too could take the stakes in our banks in the form of preferred stock with a warrants' kicker - so that we as taxpayers received both a steady and generous stream of income, and a very generous share of any future capital gains.

    And I think, as I say, that if the worst came to the worst, that's what the PM and Chancellor would do.

    Now, here's my modification of the Treasury proposal, my twist on a conventional Government rescue.

    It's about making the most of a new institution that the Government has already established, the Personal Accounts Delivery Authority (PADA), which is setting up a new national pensions savings scheme for launch in 2012.

    This will be a semi-compulsory, contributory pensions scheme for those not already in an occupational pension scheme - who number many millions, including a disproportionate number on low incomes.

    My suggestion is that the Government could lend, say, £50bn to the PADA, and it could then use that cash to buy cheap stakes in banks, to help them recapitalise, and also - perhaps - to pick up other distressed assets.

    Why am I excited by this idea?

    Well, for those with deep pockets - like Warren Buffett - now and over the next couple of years is the best possible moment to be investing.

    The best time to invest, always, is when everything looks gloomiest. That's when the bargains are to be had.

    But normally those bargains are only available to the super-wealthy. Those on low incomes almost never have the money to invest when asset prices are low.

    However, if endowed with a jumbo loan from taxpayers, PADA could invest like Buffett on behalf of the low paid.

    It would be important that as and when employees and employers start putting their money into the scheme, in 2012, they should buy in at the effective price at which the stakes were built in banks and any other assets were acquired.

    What I mean by this is that contributors to the scheme at the off should receive any upside in the value of these investments that had already accrued - which would also be an incentive for them to invest, because savers would receive an automatic and instant uplift in the value of what they put in.

    And if by bad luck there weren't any upside by then, well then those capital losses would revert to all taxpayers - but the risk of capital losses would, I think, be quite small.

    Anyway, the big point here is that for the past few years, there's been a massive widening in the gap between the rich and poor, because it's only been the rich and the super-rich who've been able to take advantage of the fabulous investment opportunities that presented themselves in the decade or so before the Crunch.

    But the boot is now on the other foot. Probably only governments, through the deployment of taxpayers' money, can solve a financial crisis that was created in large part by the foolish financial risks taken by bankers and financiers whose common sense was wiped out by greed.

    If we as taxpayers are cleaning up the mess, there should perhaps be a dividend for those in low paid jobs and insecure employment, who are hurt most by the economic slowdown precipitated by this crisis.

    If PADA bought into the market for them over the coming two or three years, their retirement prospects should be that much improved.

    And if the PADA could become an institutionalised Buffett on their behalf - buying low and selling dear - well then a bit of natural justice might be restored to the financial system.


    Markets call time on Iceland

    • Robert Peston
    • 4 Oct 08, 12:35 PM

    The best way of seeing Iceland is as a country that turned itself into a giant hedge fund.

    For years it paid higher interest rates than in many parts of the world, so its financial institutions borrowed a ton of hot money from abroad, which they then re-cycled into investments all over northern Europe, including the UK.

    The Icelandic banking boom was an economic phenomenon created by what's known as the carry trade - whereby colossal sums of money were borrowed in places like Japan, where interest rates were effectively zero, for lending to institutions in high-interest-paying economies, such as Iceland.

    This, for years, seemed to be a no-lose arbitrage on differential interest rates in a globalised economy.

    But it was just another manifestation of the pumping up of the credit bubble, which is now deflating and hurting us all.

    Here are the lethal statistics about Iceland: the value of its economic output, its GDP, is about $20bn; but its big banks have borrowed some $120bn in foreign currencies.

    Now that's what I call leverage - and remember that's just the overseas liabilities of its commercial banks.

    If this were a business, and if it had no other borrowings (which of course Iceland does have), this would be a debt-to-ebitda ratio of 6.

    Or to put it another way, Iceland simply doesn't have the domestic earnings to service this kind of debt.

    Which is why if the Icelandic government were to formally underwrite all these liabilities - which it might just have to do, given that other banks and financial institutions no longer want to touch Iceland with the longest barge-pole ever constructed - well its national-debt-to-GDP ratio would be at a level that make the UK in the 1970s look like a model of prudence.

    And if Icelandic taxpayers actually had to service all that debt, well there wouldn't be a lot left over for even the basics of life.

    It's a proper old mess.

    Of course I'm being a tad unfair, in that the banks that have foolishly borrowed all this wonga have invested in tanker-loads of offshore assets.

    Much of the British high street, a load of property and the Hammers have been financed or are owned by Icelandic banks and financiers.

    And those that have borrowed from Icelandic banks have frequently borrowed too much. Which means they will have to start looking for alternative sources of working capital and debt at a time when over-leveraged outfits aren't flavour of the month with our banks. Ouch.

    So Iceland's problems have a direct knock-on for the British economy - and goodness alone knows how exposed our banks are to Icelandic ones through the interbank market or derivatives market. One British bank with a reasonable name and a long history, Singer & Friedlander, is owned by the Icelandic bank, Kaupthing.

    That'll be making the City watchdog, the Financial Services Authority, a tad uncomfortable, because Kaupthing - which is no minnow, with gross assets of $73bn - has the worst case of financial BO I've encountered in some time.

    On Friday, had anyone wished to take out insurance in the credit default swaps market to guarantee repayment of debt issued by Kaupthing, he or she would have had to pay a premium of £625,000 to guarantee the return of £1m.

    Which is simply to say that Kaupthing couldn't issue new debt, even if it wanted to.

    And even the Icelandic government is classed by the markets as a lousy credit risk. On Friday, the cost of insuring $10m of Icelandic debt was $1.5m up front and $500,000 a year - a cripplingly large premium.

    So what'll happen to poor indebted Iceland?

    Well, although its central bank has fairly substantial reserves - enough according to the central bank governor to cover imports for eight to nine months - it's difficult to see how it can re-float without international help.


    Financial crisis at-a-glance: 7 Oct

    All times in BST, chart in GMT.

    1815: US Federal Reserve chief Ben Bernanke says prospect for economic growth has worsened, and hints at a possible interest rate cut.

    1754: Belgium raises minimum guarantee on bank deposits to 100,000 euros - an increase of 20,000 euros.

    1644: Spain increases guarantee for customers' bank savings accounts from 20,000 euros to 100,000 euros.

    1528: Netherlands trebles the amount of savers' deposits it will protect to 100,000 euros

    1513: Russia's RTS stock market closes down 0.95%, the day after it recorded a 19% fall.

    1459: French President Nicolas Sarkozy tells cabinet the state is ready to acquire stakes in the capital of troubled banks, if necessary.

    1457: The British Chamber of Commerce warns that Britain's economy will shrink in the third quarter for the first time in 15 years.

    1443: The Dow Jones is up 145 points in early morning trading.

    1401: The US Federal Reserve announces plans to buy massive amounts of short-term debt from companies in an effort to unfreeze the money markets.

    This is an important move because, as BBC business editor Robert Peston said in his blog : "The really urgent issue is the breakdown of wholesale markets and the increasing difficulty that almost all banks are having in funding themselves on a day-to-day basis."

    1400: IMF warns that financial crisis likely to be associated with "severe and protracted economic downturns".

    1336: European Union finance ministers agree to increase the guarantee for customers' bank savings accounts to at least 50,000 euros.

    1331: Beleaguered German bank Hypo Real Estate says its chief executive, George Funke, is resigning, one day after the finance ministry has agreed a 50bn euro ($68bn; £38.7bn) plan to save it.

    1247: Iceland's biggest bank, Kaupthing , gets a loan of $680m from the country's central bank.

    1213: Taiwan's Premier outlines government plans to fully protect depositors' savings.

    1132: US light crude oil rallies to just above $90 a barrel.

    1118: Russian President Dmitry Medvedev pledges credit of up to $36bn (£21bn) to the country's banks.

    1107: Royal Bank of Scotland shares recover slightly - now trading at 110.6 pence, down 25%.

    1055: The Central Bank of Iceland fixes the exchange rate of the country's currency, the krona, to try to stabilise the domestic economy.

    1025: Iceland's central bank says in a statement that Russia has agreed to loan it 4bn euros (£3.1bn). However, a spokesman for Russian Prime Minister Vladimir Putin says he cannot confirm the statement.

    0936: Russian regulator delays start of trading on Moscow exchanges until 1300 local time (1000 BST), two-and-a-half hours after normal opening.

    0935: The Icelandic government takes control of Landsbanki , the country's second largest bank, which owns Icesave in the UK.

    0922: Royal Bank of Scotland shares are down 39%.

    0921: The pound hits a two-and-a-half year low against the US dollar.

    0900: The FTSE retreats, leaving the index just 20.1 points higher at 4609.3 after an hour of trading.

    0857: Royal Bank of Scotland shares slump 30% on reports that it is in talks to secure government funding. Other top banking shares drop between 14% and 24%.

    0843: Frankfurt's DAX 30 is up 1.47% and the Paris Cac 40 climbs 3.08%.

    0810: London's FTSE 100 rises 1.5%, recovering some of the losses from Monday when it fell by 7.86%.

    0720: Moscow's two stock exchanges say they will stay closed for the morning.

    0700: Japan's Nikkei 225 share index finishes above 10,000, but is still down 3% on the day at 10,155.9.

    0500: Japan's central bank says it is keeping its key interest rate unchanged at 0.5%.

    0500: Australia's central bank cuts its key interest rate to 6% from 7% - a much greater cut than had been expected.

    0120: Japan's benchmark Nikkei 225 share index falls below 10,000 for the first time since December 2003.

    UK economy 'already in recession'

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    BCC Director-General David Frost: 'Strong action has to be taken now'

    Britain is already in a recession, which is worsening and could see unemployment rise by 350,000 by next year, a business group has warned.

    A quarterly survey of 5,000 businesses by the British Chambers of Commerce (BCC) says confidence has collapsed in both manufacturing and service sectors.

    The firms call for urgent action from the government and the Bank of England.

    The survey came as figures showed UK manufacturing output in August had fallen for a sixth consecutive month.

    Figures from the Office for National Statistics (ONS) showed that manufacturing output had shrunk by 0.4% in August, and had dropped 1.9% from the same point last year. The manufacturing sector has not declined for six months in a row since late 1980.

    The wider measure of industrial production had fallen by 0.6% in August, the ONS said, taking the annual rate of decline to 2.3%.

    'Exceptionally bad'

    Technically the UK is not yet in recession - defined as two consecutive quarters of negative economic growth.

    But the BCC described its survey results as "exceptionally bad" and said the economy was under "immense pressure" for the second quarter in a row.

    It also said the jobless total was expected to increase within two years.

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    People on the streets of Leeds react to the economic downturn

    The BCC believes the number of people out of work will rise by between 300,000 and 350,000 over the next year or two, which would take the unemployment total to more than two million.

    Confidence had collapsed in both the manufacturing and service industries, according to the survey.

    The BCC represents small and medium sized companies, and argues that a recession has already begun.

    It wants the Bank of England to do what it can to stimulate the economy, by cutting interest rates on Thursday.

    Rate cut

    BCC Director-General David Frost said: "We are clearly in a very difficult economic period but it is important that we retain a sense of proportion.

    "Many parts of the business community continue to perform well. The government needs to say that business taxes will be cut.

    "The Bank of England needs to cut interest rates immediately and politicians need to get behind our businesses in these challenging times."

    Analysts said that the worse-than-expected industrial and manufacturing production figures had added to expectations that the Bank of England's Monetary Policy Committee (MPC) would cut interest rates on Thursday.

    "[The figures are] a lot worse than the markets were expecting. The slowdown shows that the UK economy is suffering on all fronts," said David Page of Investec.

    "We think this continues to argue for support for the UK economy which we expect to find coming from the MPC on Thursday."

    EU moves to reassure bank savers

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    Christine Lagarde: 'We are determined to guarantee stability in our banking system'

    European Union finance ministers have agreed to increase the guarantee for customers' bank savings accounts to at least 50,000 euros ($68,250; £38,900).

    The ministers reached agreement at emergency talks on the financial crisis in Luxembourg.

    They also agreed to support big banks in trouble in order to protect the financial system.

    "We have agreed to support systemic financial institutions," deputy German finance minister Joerg Asmussen said.

    Until the outbreak of the turmoil in the financial sector, most EU governments guaranteed consumer savings of up to 25,000 euros.

    However, several countries wanted to raise the minimum guarantee even higher than 50,000 euros - to 100,000 euros. Countries such as Greece and Ireland have already issued blanket guarantees for savers.

    Bank fears

    French finance minister, Christine Lagarde, who chaired the meeting, said: "We wanted to find a common position to strengthen our coordination - we have succeeded."


    		There's a mess in Europe too, because European banks were also seduced over the preceding few years into lending too much too cheaply to consumers and businesses
    Robert Peston
    BBC business editor

    "We have reiterated our determination to guarantee the stability and solidity of the banking system, " she added.

    The ministers from the 27 member states hope their measures will bolster money markets after a day of panic on Monday saw huge share index losses in Germany, France and the UK.

    A $700bn US bank bail-out and moves by several EU states to help their banks have not quelled fears.

    European and Asian markets were volatile on Tuesday as investors worried global government action may not resolve the crisis.

    Banking stocks dragged European share markets lower initially, but by early afternoon most indices had reversed earlier falls to edge ahead slightly - the UK's main FTSE 100 index was up 1.2%, while France's Cac 40 was 1.5% higher.

    Rescue fund

    Since late last week, Ireland, Germany, Greece, Austria and Denmark have declared separately that money held by ailing banks will be safe.

    Analysts say the move had angered fellow EU member states who feared it could prompt savers to transfer their money into guaranteed institutions.

    Europe's fragmented response to the crisis has so far has done little to reassure investors, correspondents say.

    Across Europe, central banks have already offered more than $74bn in short-term loans to banks in an attempt to make cash available.

    But while the idea of a European fund to rescue troubled banks has been floated, it has attracted too little support to go any further, says the BBC's economics correspondent Andrew Walker in Washington.

    Falls halt Russian market trading

    Russia's two leading stock exchanges were forced to close for several hours on Tuesday, one day after suffering massive falls in value.

    Trading on the RTS and Micex bourses was postponed by the country's financial regulator after stocks lost nearly 20% of their value on Monday.

    Soon after reopening, the RTS index rose by 0.58% while Micex gained 2.16%.

    Meanwhile, Russian President Dmitry Medvedev called for urgent action to deal with the global financial crisis.

    In a video clip posted on his website kremlin.ru, Mr Medvedev said: "International political issues and the crisis in the world financial system demand concerted and urgent actions."

    "It's absolutely clear that the time has come for new solutions."

    He said he would raise the issue at an international conference in France on 8 October.

    Monday's falls on the dollar-denominated Russian Trading System (RTS) index and the rouble-denominated Micex (Moscow Interbank Currency Exchange) were the steepest declines for a market that was booming until recently.

    Since May, the RTS index has dropped more than 60%.












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