WB warns of financial crisis' effects

WASHINGTON - World Bank President Robert Zoellick said Monday the way the world tries to solve its economic problems needs to be rethought amid today's global crisis, including turning the Group of Seven into a Steering Group that empowers rising economic states.

Referring to the upcoming US election, Zoellick said the new president will have to move beyond "the firefight of financial stabilisation" to address the "economic aftermath."

Whoever wins the White House should work with others in modernising the multilateral system as there needs to be a greater shared responsibility for the health and effective functioning of today's global economy, he said.

"The G-7 is not working. We need a better group for a different time," Zoellick said in a speech to the Peterson Institute for International Economics, a leading think tank in Washington DC.

"For financial and economic cooperation, we should consider a new Steering Group including Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, and the current G-7," he said.

Speaking ahead of the Annual Meetings of the World Bank Group, Zoellick said the new Steering Group should be more than just replacing the G-7 with a fixed-number G-14, as this would be using old world methods to remake the new.

The Steering Group should evolve to fit changing circumstances, including new emerging powers, while serving as a network for frequent interaction, he said. "We need a Facebook for multilateral economic diplomacy," Zoellick said.

Warning about the effects of the financial crisis, Zoellick said "The events of September could be a tipping point for many developing countries."

"A drop in exports, as well as capital inflow, will trigger a falloff in investments," he noted. "Deceleration of growth and deteriorating financing conditions, combined with monetary tightening, will trigger business failures and possibly banking emergencies."

"Some countries will slip toward balance of payments crises. As is always the case, the most poor are the most defenceless," he said.

AFP adds: Desperate new measures by governments in Europe and North America to stabilise the financial system failed to stop panic selling that swept global markets Monday amid deepening gloom at the scope of the banking crisis.

Nothing seemed to stop stock markets taking, in many cases, record falls.

European Union leaders vowed in a joint statement to "take whatever measures are necessary to maintain the stability of the financial system" and the US Federal Reserve said it would pay interest on bank deposits for the first time in a bid to increase liquidity.

Even the 50-billion-euro (68-billion-dollar) bailout of German bank Hypo Real Estate (HRE) and takeover of Dutch-Belgian bank Fortis by French giant BNP Paribas did little to ease turmoil.

"There is all-out panic," said Adrian van Tiggelen, ING senior strategist in The Hague.

New York's Dow Jones index skidded below 10,000 points for the first time since October 2004 as it quickly lost five per cent after the open.

London and Paris nosedived by more than eight per cent and Tokyo closed at a new four year low.

"The markets are extremely volatile," said Laurent Saint Aubin, the veteran Paris-based head of the Aurel brokerage's traders. "Flutuations like this within a single day, that's pretty rare," he added in front of a screen of red.

In a round-the-world rout, Russia's RTS stock market closed down 19.10 per cent, Indonesian shares fell 10 per cent and trading in Brazil's stock market - Latin America's biggest - was twice suspended after massive losses.

Doubts over the effectiveness of the 700 billion dollar US rescue package and the European measures all hit confidence, analysts said.

After a summit of the EU's big four leaders in Paris at the weekend failed to bring about a significant breakthrough, member states' leaders issued a joint statement on Monday vowing to defend banks.

The declaration said governments would defend financial stability by providing "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," it added.

"In taking these measures, European leaders acknowledge the need for close coordination and cooperation," according to the text, which French President Nicolas Sarkozy read out on the steps of his office in Paris.

However European governments appeared divided on whether guaranteeing all deposits was the best way to safeguard confidence, and the EU commission called on member states for better coordination.

Denmark, Portugal and Iceland guaranteed deposits, emulating Germany on Sunday and Ireland and Greece last week, adding pressure on other European governments to follow suit.

The German finance ministry said the value of its guarantee was "significantly more than one trillion euros."

British Prime Minister Gordon Brown called a meeting of his "economic war cabinet". Finance minister Alistair Darling said the government would consider extending insurance guarantees.

Amid the turbulence, the euro fell to a 13-month low of 1.3551 dollars. Oil prices slipped below 90 dollars a barrel amid fears of a global downturn.

International Monetary Fund chief Dominique Strauss-Kahn said the IMF's upcoming World Economic Outlook would show a marked fall in growth and warned the crisis could trigger famines in Africa and Latin America.

"The consequences may be extremely serious because they will be counted in terms of famine or malnutrition in children."

The turmoil emerged after the collapse of loans to would-be US homebuyers with dark credit histories and caused a chaotic chain reaction, revealing how cheap credit throughout the financial system had created a massive bubble.

The US government agreed Friday to buy up 700 billion dollars of bad mortgages and other assets from banks, freeing them up to start lending again. But President George W. Bush has warned the impact will not be felt immediately.

In Belgium, trading in shares of Fortis were suspended, the day after BNP Paribas took a controlling interest in the troubled finance group under an emergency deal with the Belgian and Luxembourg governments.

Central banks continued to pump tens of billions of dollars into interbank money markets that are now essentially on life-support from state institutions because commercial banks are too frightened to lend to each other.

In a bid to increase liquidity, the US Federal Reserve said it would begin to pay interest on bank deposits for the first time and expand its refinancing operations for commercial banks to 600 billion dollars.

Meanwhile Bank of America said it was ready to spend up to 8.4 billion dollars to restructure the loan portfolio of mortgage giant Countrywide after settlement of a lawsuit targeting the firm's "predatory" lending practices.

The bank said the programme was designed to help borrowers who financed their homes with high-risk subprime loans serviced by Countrywide, which it acquired in July.

The London FTSE 100 index of leading shares fell 7.85 percent to 4,589.19 points while in Paris the CAC 40 index shed 9.04 percent, its heaviest one-day loss since its creation in 1988, to 3,711.98 points.

The Frankfurt DAX lost 7.07 percent at 5,387.01 points. In Dublin the Irish stock exchange's main ISEQ index ended with a loss of 9.59 percent at 3,565.54, with banks taking the hardest hit.

Markets in Amsterdam, Madrid, Milan and Brussels were down between 6.0 and 9.14 percent at the end of the day.

Iceland's stock market suspended trading in all financial shares including three major banks on Monday amid government talks on a possible rescue for the banking sector.

Russia's dollar-denominated RTS stock market suffered its worst-ever one-day fall, closing down 19.10 percent, a spokesman for the bourse told AFP.

"It was the biggest one-day fall" ever, the spokesman said after the index closed at 866.39 points, 65 percent down from an all-time high posted in May this year.

Nordic markets also took a heavy beating.