19 Jan 2009

British PM calls for world action on credit crisis

6:35 am on 19 January 2009

The global recession could deepen unless countries unite to try to solve the worst economic crisis in decades and banks resist "financial isolationism", British Prime Minister Gordon Brown warns.

The former finance minister, who hosts a London summit of G20 leading industrial states in April, told the Financial Times on Saturday that a joint international effort would provide the key to unlocking the credit markets and kick start the recovery.

"The greatest risk after the events of the last few months is a retreat into what I would call financial isolationism," he said. "A lot will depend on the degree of international cooperation."

Confidence in the credit markets will only return if banks reveal the true scale of their bad assets and avoid the temptation to retreat into their domestic markets, Mr Brown said.

"One of the necessary elements for the next stage is for people to have a clear understanding that bad assets have been written off. We have got to be clear that where we have got clearly bad assets, I expect them to be dealt with."

Despite a multi-billion pound bank bailout last year and a series of record rate cuts, banks remain unwilling to increase lending as they try to boost their coffers and avoid risk.

Mr Brown reprimanded British banks, telling them they must declare and write off their bad debts as soon as possible to allow confidence to return to financial markets.

He said the government might underwrite or buy bad assets and put them into what he called "a bad bank".

Mr Brown declined to rule out further capital injections or even bank nationalisations, suggesting another rescue package was on the way.

With an election due before May next year, Mr Brown is under pressure to prove he is the right leader to handle the economic crisis.

Although his poll ratings rose in the early days of the turmoil, he has recently lost more ground to the opposition Conservative Party.

Bank shares tumble

Worries about the fate of the banking sector sent financial shares tumbling around the world on Friday.

In the United States, Bank of America Corp shares closed down 13.7%, while Citigroup fell 8.6%.

Citigroup said it planned to split into two units, while Bank of America took $US20 billion in government aid after both banks suffered huge quarterly losses from the credit crisis.

British banks were also hit. Barclays was the worst casualty: Its shares plunged in a frenzied last hour of dealing, closing down 25% at 98 pence, the lowest since 1993.