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Fears of world recession mount (AFP)

26 minutes ago

WASHINGTON (AFP) - Growing fears that the financial crisis will morph into a worldwide recession prompted a new bloodbath on stock markets Wednesday as EU leaders pushed for swift moves to overhaul global finance.

"The world economy is still headed into a recession despite the global financial market rescue effort," said Carl Weinberg, chief economist at High Frequency Economics.

"The decline will be deep and protracted. It has already started. Nowhere is the economic house in greater disorder than Euroland, although some may argue that Japan is a bigger mess."

With most analysts saying that a US recession appears virtually certain due to the impact of the credit crunch and housing meltdown, the leaders of the 27-nation European Union are struggling to shore up their economies.

French President Nicolas Sarkozy announced at a summit in Brussels that EU leaders had agreed a common action plan and on the need for a global summit to address the crisis, possibly in November.

"The whole of Europe, without exception, approves the measures adopted on Sunday in Paris" by the 15 nations that make up the single currency eurozone and Britain, he told a press conference.

Leaders from euro countries backed a wide-ranging bank rescue plan on Sunday that included measures to inject new capital into ailing lenders and encourage the flow of credit to consumers and businesses.

"The system must be completely overhauled, an overhaul that must be global," Sarkozy, who will meet this week in the US with President George W. Bush, had earlier told his peers.

"A new capitalism is needed, based on values which put finance at the service of business and citizens, and not vice versa."

Amid further bleak US data that showed retail sales slumped 1.2 percent in September, the sharpest drop since August 2005, New York's Dow Jones Industrial Average suffered its worst percentage drop since 1987.

The index slid 733.08 points (7.87 percent) to close at 8,577.91 in the worst one-day point loss since last month's record 777-point decline.

London's FTSE 100 index of leading shares shed 7.16 percent, while in Paris the CAC 40 fell 6.82 percent and the Frankfurt DAX gave up 6.49 percent.

In Asia, Tokyo added 1.06 percent, building on Tuesday's record 14 percent gain but Hong Kong closed down 5.0 percent.

Late Tuesday, San Francisco Federal Reserve president Janet Yellen became the first US central bank official to acknowledge a recession is probably underway.

She said she expected essentially no growth at all in the third quarter and "an outright contraction" in the fourth quarter.

"Indeed, the US economy appears to be in a recession," she said.

After the US agreed a 700-billion dollar bailout plan of which 250 billion will be injected into banks, Bush said Wednesday that such "extraordinary" government intervention did not threaten free markets.

"It's very important for the American people to know that the program is designed to preserve free enterprise, not replace free enterprise," Bush said.

The leaders of the Group of Eight (G8) major economies pledged in a joint statement to hold a global financial crisis summit "in the near future" with other key countries.

Leaders of the G8, which groups Britain, Canada, France, Germany, Italy, Japan, Russia and the United States, "are united in our commitment to fulfill our shared responsibility to resolve the current crisis," they said.

In Germany, Chancellor Angela Merkel said the number three-economy faces a major test.

"Germany is strong but Germany is going to go through a difficult period," she warned as she urged parliament to pass a 480-billion-euro (655-billion-dollar) bank rescue package.

Governments announced more measures to douse the financial storm.

-- The French Senate approved a 360-billion-euro bank rescue package in response to the global financial crisis, a day after it was passed in the lower house.

-- The European Central Bank (ECB) moved to make it easier and cheaper for eurozone banks to borrow dollars and Swiss francs.

-- The European Commission proposed that minimum state guarantees on bank deposits should be increased within one year to 100,000 euros (136,000 dollars) from a recently agreed 50,000 euros in a new bid to strengthen confidence.

-- Iceland's central bank cut its key interest rate by 3.5 percentage points to 12 percent.

Stocks across Latin America also tumbled badly Wednesday, giving up most of the gains recorded in spectacular rallies earlier in the week. Brazil's share market, the biggest in the region, finished down 11.39 percent, while Argentine equities slumped 12.14 percent.

Regions : Europe

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