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09Mar09
EU backs IMF fund boost
The European Union was set to back calls to double the International Monetary Fund's arsenal to $500 billion to fight the financial crisis as top central bankers said the global economy may be nearing a turning point.
U.S. stocks moved higher in early trading but then flattened after other market sank toward 14-year lows in a broad-based selloff.
Economic gloom spread from Asia to Europe as Japan recorded its largest current-account deficit, and U.S. stocks traded skittishly on persistent lack of confidence in steps to shore up ailing banks.
A $41 billion deal for Merck & Co Inc to take over Schering-Plough Corp failed to spark a rally in the broader market.
Billionaire investor Warren Buffett said the U.S. economy had "fallen off a cliff" and warned of the risk that inflation will accompany any rebound.
European Central Bank President Jean-Claude Trichet said financial markets are underestimating the potential for a recovery.
"We are identifying a number of elements in the global economy ... that are expansionary," Trichet said.
Trichet, who chaired talks on the global economy at a Bank for International Settlements meeting in Basel, cited the fall in commodity and oil prices, budget stimulus packages and commitments not to let major financial institutions fail.
U.S. economic policy adviser Larry Summers said a coordinated global effort was needed to stimulate demand and pull the world out of recession. The European Investment bank promised speedy approval for extra loans, notably for the car sector, and more bond issues.
The IMF, which acknowledged last week its warnings before the crisis were insufficient, has called for a doubling of its funds to $500 billion as a growing number of countries turn to it for help, ahead of a G20 summit in London next month.
An EU draft document obtained by Reuters, which is set to be approved by EU ministers on Tuesday, said: "It is essential that the IMF has appropriate financial means to assist countries particularly affected by the current crisis.
Big Deal
Worries about the bigger economic picture weighed on enthusiasm for the marriage of Merck and Schering-Plough marriage.
"In any other market, this would be really bullish news," said Peter Kenny, managing director at Knight Equity Markets.
MSCI's all-country world stock index was down 0.7 percent, bringing year-to-date losses to 27 percent. Investors remain particularly concerned about the potential nationalization of U.S. banks.
"The recession is very dire. You have an incredible rise in risk premium so people expect the worst. Banking results are getting worse," said Giorgio Radaelli, chief strategist at wealth manager BSI in Switzerland.
Buffett told CNBC television that U.S. economic developments were close to the worst case he had imagined and said recovery would not happen fast. He warned a rebound could rekindle inflation worse than that of the late 1970s.
"People are confused and scared," he said.
The Conference Board, a research group, said the U.S. job market weakened sharply in February and has deteriorated over the last year at its worst rate in at least 35 years.
U.S. oil futures were up more than $1 to above $47 a barrel.
Focus On Demand
Summers, director of U.S. President Barack Obama's National Economic Council, said stimulating demand should be the focus of the G20 group of rich and developing nations, whose finance ministers will meet this week ahead of the April summit.
"The right macroeconomic focus for the G20 is on global demand and the world needs more global demand," Summers said in an interview with the Financial Times.
Japan's largest deficit on record in January came as the global financial crisis dried up demand for Japanese exports, which combined with a strong yen at the time to shrink profits from overseas investments.
"Supply-demand dynamics have changed, and the current account balance indicates further yen weakness," said Kimihiko Tomita, head of foreign exchange at State Street Bank & Trust.
"This is big news, because we aren't used to trading the yen in an environment of current-account deficits."
[Source: By Jan Strupczewski and Brian Moss, Reuters, Brussels and New York, 09Mar09]
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