Central banks unleash rate cuts in new day of turmoil

Leading central banks unleashed coordinated interest rate cuts on Wednesday in a bid to counter the global financial crisis amid dire warnings about the economic pain ahead.

US Treasury Secretary Henry Paulson said that more financial firms were expected to go bankrupt in the United States and the International Monetary Fund warned of a "major downturn" for the global economy.

On stock markets, panic-selling continued, with the Tokyo stock market suffering its worst day since the 1987 stock market crash and European markets losing another 5.0-6.0 percent.

On Wall Street, the Dow dropped 2.01 percent, the sixth successive day of falls after a highly volatile session.

The US Federal Reserve, the European Central Bank , Bank of England and central banks in Sweden and Switzerland all cut their rates by half a percentage point. China joined in, cutting 27 basis points off its key rate.

The central banks highlighted in a joint statement that they had cooperated in "unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets" during the crisis.

"It was a very good way to underline the concerns and the shared concerns. In that way, it helps," analyst Peter Kretzmer from Bank of America in New York told AFP.

The rate cuts and a separate move by Britain to pump 87 billion dollars into its stricken banks were designed to underpin shaky confidence in the financial system after a wave of bankruptcies.

US Treasury Secretary Henry Paulson warned that more financial firms should be expected to go under in the United States despite a massive 700-billion-dollar rescue package approved last week.

"One thing we must recognize -- even with the new Treasury authorities, some financial institutions will fail," Paulson said, adding that the financial chaos had "seriously impacted" the economy.

Political leaders welcomed the interest rate cuts. "It is important and helpful that central banks are working in a coordinated way to deal with stress in the financial system," White House spokesman Tony Fratto said.

German Chancellor Angela Merkel said it would "help build confidence" in the global economy and French President Nicolas Sarkozy, current EU president, called it a "very important decision."

Neither the rate cut nor Britain's costly initiative to bolster the banking system could halt another stock market freefall across the world.

Panic selling hit Asian stock exchanges. Tokyo dropped 9.38 percent, Hong Kong fell 8.2 percent and Sydney 5.0 percent.

While the initial impact of the central banks' move was to breathe some life back into the main European markets, the relief was only temporary.

The London stock market plunged 5.38 percent, with dealers saying investors were unconvinced that the rate cuts would stop the rot.

On Wall Street, the Dow Jones Industrial Average dropped 2.01 percent to close at 9,257.15. The blue-chip index has shed 14.7 percent, or more than 1,600 points, in the past six sessions.

Some analysts felt that central banks should further cut rates. The Fed, with its main rate at 1.5 percent, has little room for maneuver however.

"The central banks have to cut their rates further ... we have lost too much time," Robert Halver, a strategist at Baader Bank in Frankfurt told AFP.

Unveiling a package which will see Britain's eight main banks partly nationalized, Prime Minister Gordon Brown said "the global financial market has ceased to function" and needed "bold and far-reaching solutions."

The government said it would use 50 billion pounds (64 billion euros, 87 billion dollars) to buy stakes in HSBC, Royal Bank of Scotland, Barclays, HBOS, Lloyds TSB, Standard Chartered, Abbey and Nationwide Building Society.

It would also make available 200 billion pounds in short-term loans and issue 250 billion pounds to guarantee loans between banks.

In other moves, the Federal Reserve announced that it had authorized a new 37.8-billion-dollar cash infusion into troubled insurance giant AIG, which was nationalized last month to save it from bankruptcy.

The Fed said that an 85-billion-dollar loan facility made available to AIG last month had been drawn down.

In Iceland, the northern island nation worst hit by the financial crisis, the central bank said it was abandoning efforts to shore up the national currency, which has collapsed in value.

The government has since Tuesday nationalized two of the country's three biggest banks and Prime Minister Geir Haarde said the country's economic recovery would take years.

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