Finance chiefs from the world's three biggest economies tried on Tuesday to keep a lid on credit jitters, but US Treasury Secretary Henry Paulson admitted that global financial turmoil would take time to play out.
Japanese Finance Minister Koji Omi and Paulson agreed to keep a close eye on markets while German Finance Minister Peer Steinbrueck said there was little sign of the wider economy suffering.
Paulson said that financial markets would settle down but only after a necessary period of repricing risk. "Credit is being repriced, reassessed across our capital markets," he told CNBC Television. "This will play out over time and liquidity will return to normal when ... investors have a better understanding of the risk-return trade off."
The chief executive of Germany's WestLB bank, Alexander Stuhlmann, said big problems in the US subprime mortgage market were making it difficult for German banks to get credit lines from their foreign partners.
Stuhlmann told reporters that German banks were in a "not uncritical situation" overall. WestLB has over 1.2 billion euros in overall exposure to the US subprime sector - those loans extended to mainly poor people with weak credit histories.
His assessment followed an announcement from Capital One Financial Corp that it will cut 1,900 jobs and shut down a wholesale mortgage unit it acquired less than a year ago.
Omi told a news conference there were no plans for an emergency meeting of the Group of Seven industrialised nations following sharp gyrations in global markets. But in a telephone conversation, he and Paulson agreed to keep a close watch on markets and stay in close contact.
"I could tell he has been making various efforts," Omi said. "We agreed that we will watch markets developments carefully for a while." Steinbrueck insisted Europe's economy was sustaining little damage. "I have no reason to doubt that we can effectively manage the effects of the US mortgage crisis in Europe," he said.
Paulson was more equivocal, saying market turmoil would take a toll although the global economy remained strong. "Economic growth will be less than it ordinarily would have been," he said.
Investors were ultra-cautious after last week's stock market slide, as rumours flew of more credit problems coming to light. "If there is more bad news, what we saw last week is probably going to repeat itself. Most people think it will take another two months before things calm down," said Irvin Seah, an economist at DBS Bank in Singapore.
US FINANCE BOSSES MEET: US policymakers will take centre-stage as Paulson, Federal Reserve Chairman Ben Bernanke and Senate Banking Committee Chairman Chris Dodd meet to discuss market conditions. The closed-door meeting is scheduled for 1400 GMT and Dodd is due to hold a news conference afterwards.
Speculation is feverish that the Federal Reserve may cut the federal funds rate, its key policy rate, from 5.25 percent, at its September 18 meeting or even earlier. On Friday, the Fed cut the discount rate that governs its loans to banks by half a percentage point to 5.75 percent, a move which helped bloodied stock markets claw back lost ground.
Central banks remained watchful. The European Central Bank injected more money into markets than expected after commercial banks showed strong demand for funds while credit worries make them unwilling to lend to each other. The ECB lent a total of 275 billion euros ($371.1 billion) to banks for a week, 46 billion more than it estimated they needed for routine weekly financing.
The Bank of England said it lent 314 million pounds ($624 million) through its standing facility in the previous session, the first time it has been tapped in more than a month. Stock markets continued to trade with uncertainty. The Dow Jones industrial average opened lower on Wall Street and European shares slid, ending a two-session rally, with banking stocks leading the way down.
But Japan's Nikkei index rose 1.1 percent and is now up 4.1 percent in two sessions, after plunging 9 percent last week. US Treasuries rallied again after yields on three-month bills posted their biggest one-day drop since the 1987 stock market crash on Monday as investors fled risk.
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