Increasing clamour for co-ordinated initiatives

IMF MEETING:Investors have thus far remained unconvinced by ad-hoc interventions in the free market, writes Arthur Beesley, Senior Business Correspondent in Washington

AS GLOBAL financial leaders flew in for a series of crucial political meetings on the financial crisis, dire losses on world stock markets underscored the intensity of the firestorm they are desperately trying to contain.

On the morning after US stocks suffered their worst rout since the 1987 crash, the Dow Jones fell 8.1 per cent in early business to briefly dip below 8,000.

Although some of these losses were erased by lunchtime, the rapid erosion of value mirrored sharp declines in Europe and Asia.

The combined forces of the G-7 group of leading industrial nations and the International Monetary Fund (IMF) are under mounting pressure this weekend to plot a course out of the morass.

President George Bush meets early this morning in the White House with G-7 finance ministers and IMF managing director Dominique Strauss-Khan, following their meeting last night with the US treasury secretary Hank Paulson.

With money markets still frozen, investors remain unconvinced by a torrent of ad-hoc government interventions in the free market.

Hence the increasing clamour for co-ordinated action by the international community, difficult as it will undoubtedly be to agree upon such measures and execute them.

"Rightly or wrongly - and I think rightly - they're looking at the IMF for a co-ordinated effort, and that alone is extremely unusual for markets in this country to even think about," said Dr Charles Geeist, a professor of finance at Manhattan College.

Warning that "anxiety can feed anxiety", Mr Bush urged Americans yesterday to remain confident and promised to restore stability in the face of a global stock market panic. "My fellow citizens, we can solve this crisis, and we will," he said in a televised addressed.

In advance of last night's G-7 meeting, talk centred on the possibility of the US government temporarily introducing an unlimited guarantee on bank deposits.

Following numerous other measures including the $700 billion bailout plan, co-ordinated interest rate cuts and liquidity injections by central banks, such a measure would be designed to restore confidence in credit markets. As banks conserve liquidity, they are all but refusing to lend money to each other.

The possibility of a blanket guarantee on deposits was publicly raised by Mr Strauss-Kahn, who emphasised in a conference speech that such a measure would have to include all interbank deposits. "This means not only retail bank deposits but probably also interbank and money market deposits, so that activity may restart in these key markets," he said.

"Of course, such a step should be temporary and include safeguards such as heightened supervision and limits on deposit rates offered."

This would be in addition to the increasing likelihood that the US government will buy shares in major financial institutions in an effort to stabilise the banking sector.

With senior Bush administration officials reported to be holding a conference call yesterday afternoon with financial services leaders, there could well be developments soon on that front.

However, the major question looming over this weekend's meeting revolves around the extent to which the international community can agree to forge a common strategy to address the crisis. In advance of the hard talk, the greater likelihood was that they would try to impose a coherent international framework over their un-co-ordinated actions rather than adopting a common co-ordinated strategy per se.

For many, however, the escalation of turmoil in recent weeks means the moment for such an approach has passed. While there were plenty calls for decisive action yesterday, a 12 per cent drop in quarterly profits at General Electric and sharp declines in the share price of Morgan Stanley and Goldman Sachs provided a sharp illustration of pressures on the financial system.

In addition, preliminary results from an auction to gauge the size of the settlement on Lehman Brothers' credit-default swaps set a value of 9.75 cent on the dollar for the debt. If confirmed, this means sellers of the insurance will have to pay bond-holders more than 90 cent in the dollar. Such a payout would be higher than anticipated.