The European Union was set to back an International Monetary Fund call for $500 billion to fight the financial crisis on Monday as world stocks sank towards 14 year lows in a broad-based sell-off. Economic gloom spread from Asia to Europe as Japan recorded its largest current-account deficit and US stocks fell at the outset on persistent lack of confidence in steps to shore up ailing banks before edging into positive territory.
Billionaire investor Warren Buffett said the US economy had "fallen off a cliff" and warned of inflation risks from any rebound, although European Central Bank President Jean-Claude Trichet said there were signs a turning point may be near. A key US policymaker said a co-ordinated global effort was needed to stimulate demand and drag the world out of recession. The European Investment bank promised speedy approval for extra loans, notably for the car sector, and more bond issues.
The IMF, which acknowledged last week its warnings before the crisis were insufficient, has called for a doubling of its funds as a growing number of countries turn to it for help, ahead of a G20 summit in London next month. An EU draft document obtained by Reuters, which is set to be approved by EU ministers on Tuesday, said: "It is essential that the IMF has appropriate financial means to assist countries particularly affected by the current crisis."
CONFUSED AND SCARED MSCI's all-country world stock index was down 0.59 percent by 1350 GMT, bringing year-to-date losses to around 24 percent. Investors remain particularly concerned about the potential nationalisation of US banks.
"The recession is very dire. You have an incredible rise in risk premium so people expect the worst. Banking results are getting worse," said Giorgio Radaelli, chief strategist at wealth manager BSI in Switzerland. Even a $41 billion deal for Merck & Co Inc to take over Schering-Plough Corp failed to spark a rally in the broader market.
"In any other market, this would be really bullish news," said Peter Kenny, managing director at Knight Equity Markets. Buffett told CNBC television that US economic developments were close to the worst case he had imagined and said recovery would not happen fast. He warned a rebound could rekindle inflation worse than that of the late 1970s.
"People are confused and scared," he said. Trichet, on the other hand, said there were signs a turning point may be near, although the global economy were still slowing. "We are identifying a number of elements in the global economy... that are expansionary," he said.
Trichet, who chaired talks on the global economy at a Bank for International Settlements meeting in Basel, cited the fall in commodity and oil prices, budget stimulus packages and commitments not to let major financial institutions fail.
FOCUS ON DEMAND US President Barack Obama's National Economic Council director Larry Summers said stimulating demand should be the focus of the G20 group of rich and developing nations, whose finance ministers will meet this week ahead of the April summit.
"The right macro-economic focus for the G20 is on global demand and the world needs more global demand," Summers said in an interview with the Financial Times. Japan's largest deficit on record in January came as the global financial crisis dried up demand for Japanese exports, which combined with a strong yen at the time to shrink profits from overseas investments.
"Supply-demand dynamics have changed, and the current account balance indicates further yen weakness," said Kimihiko Tomita, head of foreign exchange at State Street Bank & Trust. "This is big news, because we aren't used to trading the yen in an environment of current-account deficits."
In contrast, China's economy in the first quarter is forecast to expand 6.5 percent, a government think tank said. The country's trade surplus may jump 93.2 percent to $80 billion as imports shrink faster than exports.
China has taken a series of measures including a 4 trillion-yuan ($585 billion) stimulus plan, tax cuts and looser monetary policies to prevent a sharp slowdown in its economy. China's central bank vice governor Yi Gang, speaking on the sidelines of the BIS gathering in Switzerland, repeated the bank's view that no further stimulus was needed for China right now.
"At this point I think the current package of fiscal stimulus is sound and it seems already effective. So at this point I think the current stimulus package is fine," he said. In Europe, sentiment among euro zone investors deteriorated to its lowest in six years, the Sentix research group said. Its monthly investor morale index fell by more than expected to -42.7 in March from -36.1 in February.
"The absence of ideas and action by officials on this and the other side of the Atlantic is unnerving investors more and more," Sentix said. "Furthermore, investors are taking note of the sharply deteriorated economic situation in eastern Europe." In the Baltic state of Lithuania, which slid into recession in the fourth quarter, rumours of a devaluation of the litas sparked a rush at the weekend to buy foreign currency. Its central bank said there was no such danger.