The Group of Seven warned on Monday the surging yen posed a threat to financial and economic stability, the latest coordinated effort by the world’s richest nations to curb the worst financial crisis in 80 years.
Signs the crisis was continuing to spread were evident across the world with South Korea slashing interest rates, Australia intervening in the currency market, Gulf Arab oil producers urging quicker monetary union, and the International Monetary Fund bailing out Hungary and Ukraine.
With the Federal Reserve almost certain to slash interest rates later in the week, British Prime Minister Gordon Brown hinted that central bank action may be more widespread.
“Now inflation is actually coming down over the next few months and that will mean that it gives scope to all the monetary authorities, including the Bank of England, round the world to make a decision about interest rates,” he told the BBC.
Financial markets continued to react sharply to the combination of financial crisis and global recession.
MSCI’s main world stock index was down more than 3 percent, closing in on a 50 percent loss for the year to date. Its emerging market counterpart was down 4 percent and touching 4-year lows.
The pan-European FTSEurofirst 300 was down 5 percent and U.S. stock index futures pointed to a poor start for Wall Street.
Volatility has surged across financial markets as investors are forced to sell assets which they bought with borrowed money to repay creditors or cover margin calls they must make as asset prices fall and credit limits are breached.
This deleveraging is crucial to restoring the long term stability and health of the financial system, but it is the speed and severity with which it is happening that is fuelling investor panic and unnerving policymakers.
It has most recently hit currency markets, described by David Shairp, global strategist at JPMorgan Asset Management as “the new apex of the crisis.”
A brief G7 statement focused on the yen, fanning speculation of the first Bank of Japan currency intervention in four years.
“We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability,” the group, comprising the United States, Japan, Germany, Britain, France, Italy and Canada, said.
The yen’s rapid 12 percent ascent against the dollar has threatened Japanese exports as the world’s second-largest economy lurches toward recession.
The dollar, however, is rising against major currencies except for the yen, so there was some skepticism about whether any coordinated action on the economy would be forthcoming.
Emergency moves
Mitsubishi UFJ Financial Group, Japan’s biggest bank, said it would raise up to $10.6 billion by issuing new shares, the latest sign that diving stocks are likely to shred profits at Japanese lenders.
Prime Minister Taro Aso said after an emergency meeting the government would expand a scheme that allows banks access to public funds and tighten rules on short-selling shares.
South Korea resorted to a record interest rate cut and Australia’s central bank intervened to support its currency as policymakers grappled with the 15-month-old crisis that has shattered investor confidence, and threatens a deep recession.
“Today’s bigger-than-usual rate cut is aimed at helping prevent a sharp slowdown in domestic demand and the overall economy,” Bank of Korea Governor Lee Seong-tae during his news conference after a 75 basis point cut to 4.25 percent.
Developing nations have also been turning to the International Monetary Fund for help to stave off the worst global financial crisis since the Great Depression in the 1930s.
The IMF said it had reached an agreement with Hungary to get a “substantial financing package” in the next few days that will include funding by the European Union and some individual European governments.
It agreed on a $16.5 billion loan for Ukraine on Sunday.
Emerging markets have been particularly hard hit.
Once high-flying Chinese stocks closed at a 25-month low, with some analysts talking of panic selling.
On Sunday, Chinese central bank governor Zhou Xiaochuan warned of danger ahead for the emerging market powerhouse.
“It is necessary to strengthen our awareness of the dangers, proactively cope with the challenges, and do a solid job of preparing to face potential difficulties,” he said.
Helping hands
The crisis was taking a toll right across the world.
Gulf Arab oil producers said at an emergency meeting on Saturday they had already taken adequate steps to deal with the impact of the global financial crisis but that turmoil on world markets had given new urgency to their plan for monetary union.
Swedish investment bank Carnegie said on Monday it had been granted a 1 billion Swedish crown ($126 million) bridge loan from the Swedish central bank pending implementation of a government guarantee scheme.
Smaller, regional U.S. banks also started seeking help from the U.S. government.
Ohio-based KeyCorp said it would add $2.5 billion in capital from the U.S. Treasury. It followed a $3.4 billion cash injection request from Fifth Third Bancorp, also Ohio-based.