The United States signalled it could consider buying into debt-laden banks to try to restore confidence in the inter-bank lending market that remained paralysed after an unprecedented coordinated global rate cut.
South Korea, Hong Kong and Taiwan today followed the US Federal Reserve and central banks from Europe, Canada and China in cutting interest rates to contain the market meltdown that has destroyed lenders from Wall Street to Iceland.
Asian markets were mixed after yesterday's global rate cuts, which analysts said showed that they would not be enough to restore confidence in the financial sector.
"Just lowering interest rates would be far from sufficient in the current situation," said Amar Gill, head of thematic research at CLSA in Singapore.
"The main problem now is that banks are not lending to weaker banks, and the overall banking system is not lending to corporates."
In its latest sign of global financial contagion, Iceland took control of the country's biggest bank Kaupthing, the third such takeover in a week.
The
New York Times,quoting unnamed government officials, said the Treasury was considering taking ownership stakes in many US banks. A Treasury spokesperson could not be reached for comment on the story.
The bank recapitalisation plan, in its preliminary stages, has emerged as one of the preferred options being discussed in Washington and on Wall Street, the
New York Timessaid.
US Treasury Secretary Henry Paulson, speaking to reporters, stressed that the recently approved $700 billion financial bailout bill gives him wide authority to inject capital into the banking system and would not rule out having Treasury take an ownership position in banks if necessary.
The United States would be taking a leaf out of Britain's book. London said yesterday it was prepared to inject £50 billion (€64 billion) of taxpayers' money into its banks and guarantee inter-bank lending.
Britain also encouraged a Europe-wide scheme to help the moribund financial sector, to which French President Nicolas Sarkozy replied that the European Union was discussing joint action.
Economies across the world are already slowing. Japan reported a sharp slide in its closely watched machinery orders data, raising expectations that the world's second-largest economy was probably in recession.
Rate cuts from South Korea and Taiwan helped regional stock markets shake off some of the fear that dominated Wall Street even after Tuesday's unprecedented coordinated easing.
But investors remained deeply unsure about how much the joint easing would help. Money markets remained frozen and overnight dollar borrowing costs jumped as high as 7 per cent in Asia, compared with the Fed's 2 per cent target.
Shares in Seoul and Taipei fell back down after initially rallying after the central banks each reduced their benchmark interest rates by 25 basis points.
Japan's Nikkei average closed down 0.5 per cent after ending the morning up, while Hong Kong's Hang Seng Index was trading 2.7 per cent higher and China's benchmark Shanghai Composite Index was down 0.5 per cent.
In a sign of the impact the turmoil is having in Asia, Indonesia kept its stock market shut for a second day today after the index lost more than a fifth of its value this week.
Reuters