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Stocks slumped Friday, with investors abandoning a recovery attempt, as the worst retail sales on record ignited fears of a long recession.

The Dow Jones industrial average (INDU) fell 338 points, or 3.8%. Earlier, the blue-chip indicator had lost as much as 363 points and gained as much as 88 points.

The Standard & Poor’s 500 (SPX) index skidded 4.1% and the Nasdaq composite (COMP) shed 5%.

All three major gauges slid on the week as well, with the Dow losing 5%, the S&P down 6.2% and the Nasdaq down 7.9%.

Stocks crumbled through the early afternoon as investors considered the bleak outlook for consumer spending amid the weak retail sales report. Selling pressure eased up in the middle of the afternoon and then returned near the close.

"The recession has been mild up to this point, but I think we’re in for a much uglier one in the fourth quarter," said Scott Anderson, senior economist at Wells Fargo. "The retail sales report demonstrates that."

U.S. sales in October posted the worst monthly decline since the Commerce Department initiated the current measurement standard in 1992.

The corporate news Friday was just as bad. Freddie Mac posted a big quarterly loss. Sun Microsystems announced massive job cuts and Citigroup is reportedly getting ready to announce layoffs.

"Fundamentally the economy is very weak," said Robert Brusca, chief economist at FAO Economics. "The Freddie Mac losses are a reminder of that."

Stocks rallied Thursday, with the Dow gaining 552 points, its third-best single-session point gain ever, as the market bounced back from levels not seen since 2003. Some analysts said that the recovery was significant in helping to establish a bear market bottom.

However, after such a rally, stocks were vulnerable to a pullback Friday, particularly after the retail sales report.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost four to one on volume of 1.45 billion shares. On the Nasdaq, decliners topped advancers by more than three to one on volume of 2.31 billion shares.

After the close, Fidelity said it was cutting an additional 1,700 jobs in the first quarter of 2009 as part of an ongoing cost-cutting effort. A week ago the company said it was cutting 1,300 jobs

Retail sales: Retail sales fell 2.8% in October versus a revised 1.3% drop in September. Sales excluding volatile autos fell 2.2% in October, versus a revised 0.5% drop in September. Both results were worse than expected, according to a survey of economists by Briefing.com. (Full story)

"Sales were pretty awful across the board," Anderson said, noting that sales plunged pretty much everywhere other than at grocery stores and on health care. "With consumers only spending on the essentials, that’s pretty dire."

Also on Friday, retailers J.C. Penney (JCP, Fortune 500) and Abercrombie & Fitch (ANF) both reported lower quarterly earnings and issued bleak forecasts for the critical fourth quarter.

A separate report showed a slight improvement in consumer sentiment, according to the latest survey from the University of Michigan. Sentiment rose to 57.9 in November from 57.6 in late October, versus forecasts for a decline to 57.

Investors were also gearing up for the Group of 20 meeting in Washington, which gathers leaders from around the world to address the global financial crisis. It kicks off with a White House dinner Friday. (Full story)

The European economy is officially in a recession, EU leaders said Friday. Germany has already said it is in a recession. Hong Kong is in a recession. And many economists think the U.S. is in a recession, despite a lack of official declaration creditscore.

Recession is generally defined as two consecutive quarters of shrinking economic growth. In the U.S. a recession is officially declared by the National Bureau of Economic Research.

Speaking early Friday, Federal Reserve Chairman Ben Bernanke said that financial markets remain under severe strain. He pledged to continue working with central banks around the world and seemed to indicate the U.S. federal reserve could cut interest rates again at the December meeting. (full story)

Company news: Troubled mortgage giant Freddie Mac (FRE, Fortune 500) reported a steep $25 billion quarterly loss and said it will start chipping away at the $100 billion in taxpayer funds set aside for its bailout. (Full story)

Sun Microsystems (JAVA, Fortune 500) said Friday it will cut up to 6,000 jobs, or 18% of its workforce, as a cost-cutting measure. The software and computer networking company also said it was restructuring its software business operations.

Citigroup (C, Fortune 500) is reportedly getting ready to lay off another 10,000 people on top of the 23,000 it has already let go, according to a Wall Street Journal story Friday. The company is also expected to boost credit card rates, the report said.

Nokia (NOK) said fourth-quarter sales for the broad mobile handset industry will decline. The phone maker said worse credit conditions and the weak economy were to blame.

Hartford Financial Group (HIG, Fortune 500), the troubled insurer, said it has purchased a small bank, making it eligible to receive up to $3.4 billion in funds from the government’s bailout plan.

Investors again pulled money out of equity mutual funds last week, following the first week in months in which investors added money to funds.

In the week ended Nov. 12, investors pulled roughly $31.8 billion out of equity mutual funds, according to tracking firm Trim Tabs. In the previous week, investors added roughly $2.2 billion to funds. However, that one week was an anomaly, with investors cashing out of funds in 15 of the last 16 weeks amid the stock market selloff.

Other markets: Asian and European markets rallied in response to the U.S. advance Thursday.

The dollar gained against the euro, but fell versus the yen.

COMEX gold for December delivery rallied $42.50 to settle at $742.50 an ounce.

U.S. light crude oil for December delivery fell $1.20 to settle at $57.04 a barrel on the New York Mercantile Exchange.

Gasoline prices dipped another 2.6 cents to a national average of $2.152 a gallon, according to a survey of credit-card activity released Friday by motorist group AAA. The decline marks the 58th consecutive day that prices have decreased. During that time, prices dropped by $1.70 a gallon, or 44.2%.

Lending rates: The cost of borrowing rose modestly Friday, but remained near recently improved levels.

The 3-month Libor rose to 2.24% from 2.15% Thursday, according to Bloomberg.com. Overnight Libor rose to 0.56% from 0.4% Thursday, and up modestly from an all-time low of 0.32% last week. Libor is a key interbank lending rate.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, fell to 0.11% from 0.19% Thursday, with investors preferring to take a small return on their money than risk the stock market. In September, the 3-month yield reached a 68-year low around 0% as investor panic peaked.

Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.72% from 3.86% Thursday. Treasury prices and yields move in opposite directions. 

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The dollar resumed its climb against other major currencies for a second day in a row Tuesday as recession fears took center stage.

The U.S. currency also got a boost against the 15-nation euro on bets that the European Central Bank will have to cut rates again before the year ends.

"The markets are actually pricing in a 50 basis point cut in December," said Kathy Lien director of currency research at Global Forex Trading in New York. "The euro-zone economy is still in a lot of trouble," she added.

The ECB, which currently has its key interest rate at 3.25%, is scheduled to meet on Dec. 20 to make a decision on interest rates.

The euro, which initially rallied following some upbeat news about German economic sentiment, fell 2.3 cents to $1.252 by the end of trading in New York Tuesday.

The dollar also rose against the British pound, which fell 2.3 cents to $1.538. But the greenback lost ground against the Japanese yen, falling ¥0.35 to ¥97.65.

"Right now the dollar is not trading on U.S. fundamentals, it’s trading on risk aversion," said Lien.

Over the past several weeks, investors have been looking to the equities markets, which are considered forward-looking indicators, for guidance on the state of the global economy and the possibility of a deep recession.

World markets: Investors sought safety as economic instability continued to rumble through global equities. In the United States, the Dow Jones industrial average fell nearly 3% as U.S. automakers floundered, overshadowed by the possibility of a government intervention short-term cash loans.

Markets in Asia and Europe also weakened, with indexes falling more than 3% in the U.K. and Japan, and more than 4% in France, Germany and Hong Kong.

While an index of German business sentiment showed a modest recovery, the reading is still negative and well below it’s historic norm.

"The oncoming global recession is too large," said John Kicklighter, currency strategist with Forex Capital Markets. "The overall [negative] sentiment is too strong," he added.

Chinese stimulus: Meanwhile enthusiasm over the $586 billion Chinese stimulus package announced Sunday faded as investors began to reassess how quickly the plan will have an impact.

"People are still kind of skeptical over what will happen," said Kicklighter.

Unlike the stimulus plan enacted by the U.S., which focused on tax rebates, the Chinese plan focuses on job creation and building infrastructure such as roads and bridges, which may take longer to implement.

Investors were initially encouraged by the Chinese plan, but then began to re-examine its impact since it will be rolled out gradually till 2010, according to Kicklighter.

"It will have a little effect, but it’s like trying to stop an oncoming train with a car," he said.

The export-driven Chinese economy continued to show weakness as well, as exports slowed, according to a report from Beijing. 

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BEIJING–China unveiled a $586 billion (U.S.) stimulus package yesterday in its biggest move to inoculate the world’s fourth-largest economy against the global financial crisis.

The cabinet approved a plan to invest the money in infrastructure and social welfare by the end of 2010, a statement on the government’s website said.

Some of the money will come from the private sector. The statement did not say how much of the spending is on new projects and how much is for ventures already in the pipeline that will be speeded up.

China’s export-driven economy is starting to feel the pinch of weakening United States and European economies, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

Economic growth slowed to 9 per cent in the third quarter, the lowest level in five years and a sharp decline from last year’s 11.9 per cent.

That is considered dangerously slow for a government that needs to create jobs for millions of new workers who enter the economy every year and to satisfy a public that has come to expect steadily rising incomes.

Exports have been growing at an annual rate of more than 20 per cent but analysts expect that may fall as low as zero in coming months as global demand weakens.

The International Monetary Fund has urged governments to adopt economic stimulus packages and, in some cases, to cut interest rates further, to counteract the slowdown.

China joins other major economies such as the U.S., Japan and Germany which have already introduced their own stimulus plans.

The U.S. allocated $168 billion earlier this year for tax rebates to individuals and tax breaks for businesses. Germany set aside $29 billion for tax breaks on new cars and credit assistance for companies. Japan allotted $275 billion for loans to small- and mid-sized businesses and discounts on highway tolls among other measures.

China’s statement said the cabinet, at a meeting chaired by Prime Minister Wen Jiabao, had "decided to adopt active fiscal policy and moderately easy monetary policies Faxless pay advance."

The statement said the spending would focus on 10 areas. They included picking up the pace of spending on low-cost housing as well as increased spending on rural infrastructure.

Money will also be poured into railways, roads and airports. Spending on health and education will rise, as will environmental protection and technology spending.

Efforts to rebuild disaster areas, such as Sichuan province where 70,000 people were killed and millions left homeless by a massive earthquake in May, will also be accelerated. That includes $2.93 billion planned for next year that will be moved up to the fourth quarter of this year.

The statement said rural and urban incomes would be increased.

Credit limits for commercial banks will also be removed to channel more lending to priority projects and rural development, it said.

Reform of the value-added tax will cut taxes by $17.5 billion for enterprises, the statement said.

The stimulus plan should give a lift to China’s shares, said Ben Simpfendorfer, an economist at Royal Bank of Scotland PLC in Hong Kong. The CSI 300 Index has tumbled 69 per cent this year, the biggest drop among stock benchmarks in the Asia-Pacific region.

"We view this as a positive step," the U.S. Treasury’s Undersecretary for International Affairs David McCormick said. "This stimulus should help encourage domestic consumption" in China, he said.

"The golden years have shuddered to a dramatic halt," said Stephen Green, head of China research at Standard Chartered Bank PLC in Shanghai.

- With files from the Star’s wire services

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U.K. consumer confidence dropped in October close to the weakest level since at least 1974 as the financial crisis spooked British shoppers, GfK NOP said.

An index of sentiment, based on a survey of 2,002 people between Oct. 3 and Oct. 19, fell 4 points from the previous month to minus 36, GfK said today in London. A gauge of consumers' willingness to make major purchases dropped 11 points to minus 42, the lowest since the series began in 1974.

House prices fell from a year earlier by the most since at least 1991 this month as banks tightened their grip on credit, Nationwide Building Society said yesterday. Policy makers will probably lower the benchmark interest rate by a half point to 4 percent next week, after they voted for an emergency cut on Oct. 8 to save the financial system from collapse, economists say.

“The turmoil surrounding the banking world and subsequent turbulence in the financial markets is making for an uncertain time,'' Rachael Joy, a spokeswoman for GfK, said in a statement. “Even the reduction of the interest rate and lower petrol prices are unlikely to have a significant effect on confidence in the upcoming months as consumers brace themselves.''

The pound dropped against the dollar today, heading for the biggest monthly decline in 16 years. The currency traded at $1.6228 as of 8:59 a.m. in London, down from $1.6451 yesterday.

Job Cuts

Retail sales in Germany fell 2.3 percent in September, the biggest decline since May 2007, a separate report showed today. Economists forecast a drop of 1 percent, according to the median of 15 estimates in a Bloomberg News survey.

Twenty-six percent of U.K. employers have backup plans to cut even more workers than currently intended in the next 12 months, a survey of 721 companies by KPMG and the Chartered Institute of Personnel and Development showed today freecreditreport. About one in five of those surveyed will seek to shed staff over 65, the age at which they can force employees to leave without providing a business reason, the report said.

The GfK consumer confidence gauge was last lower in July, when it reached minus 39, the weakest in at least 34 years.

A gauge of the general economic situation over the past 12 months fell 10 points to minus 72, the survey showed. An index measuring Britons' personal financial situation in the next year fell one points to minus 12, GfK said.

The financial crisis has crippled Britain's banking industry, forcing the government to buy stakes in some of the country's biggest lenders and ramp up public spending.

1929 Crash

U.K. policy maker David Blanchflower said this week the current crisis may turn out to be “more significant'' than the aftermath of the 1929 stock market crash. He said that the economy faces a recession for the next year and warned it will deepen if the central bank doesn't cut interest rates “significantly.''

The economy shrank 0.5 percent in the third quarter, the largest contraction since 1990. Unemployment rose in September, with jobless claims reaching the highest in almost two years.

The Bank of England will cut the benchmark interest rate by at least a half point at the next scheduled meeting on Nov. 6, according to 36 economists in a Bloomberg News survey.

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SAN FRANCISCO — Gasoline prices may be falling fast from record highs, but travelers are still avoiding the highways and jumping on buses and trains at a record pace, according to a report from the U.S. Department of Transportation.

In fact, Americans drove 15 billion fewer miles in August than they did in the same month a year ago, according to federal data.

That represents a 5.6 percent decline from August 2007, marking the biggest year-over-year decline ever recorded, U.S. Secretary of Transportation Mary Peters said in a statement.

At the same time, public transit ridership jumped 6.2 percent across the country this summer compared with a year ago.

Peters pointed out that Texas, where she spoke during a visit to a light-rail station under construction in Dallas, saw an increase of 15 percent in its DART rail system.

All this with gas currently costing a national average $2 http://payday-z.com.78 for a gallon of regular unleaded, according to recent numbers from AAA. That’s down almost a dollar from a month ago and is more or less the same as it cost in October 2007.

The surprising trend, likely exacerbated by the dismal state of the economy, is making it difficult for the government to pick up the tab. Peters warned that the lower income from gas taxes will make it difficult for the federal agency to continue to fund future projects.

"We pay for transit the same way we pay for road and bridge projects — with federal gas taxes," she said. "Relying on the gas tax is like relying on cardboard to keep the rain out — the longer you use it the less it works."

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Chinese President Hu Jintao said maintaining his country's economic growth rate, the fastest among major economies, is the best way to combat a credit crisis that threatens a global recession.

“The fundamentals of the Chinese economy have not changed,'' Hu said at the opening of a biennial summit of Asian and European leaders today in Beijing and after China reported its slowest growth in five years in the third quarter. “We must first and foremost run our own affairs well.''

The two-day Asia-Europe Meeting, known as ASEM, is the first between Asian leaders since bank failures, plunging stock markets and weakening currencies amplified fears that the world is headed for a prolonged economic decline. China was pressed ahead of the meeting to get more involved in combating the crisis by attendees, including European Commission President Jose Barroso.

“It is an obligation for us to work together,'' French President Nicolas Sarkozy said during a speech at the opening ceremony, where he appealed for support for European efforts to ease the crisis. “Europe needs Asia, it needs Asia's growth, Asia's intelligence and its creativity.''

China is seen as key to any global response because it has the world's fastest-growing major economy and $1.9 trillion of currency reserves, an amount larger than Canada's gross domestic product.

Credit Freeze

Credit markets have frozen worldwide amid $660 billion in mortgage-related losses that have forced central banks to pump $2 trillion into bailouts for failing financial institutions. The benchmark MSCI Asia Pacific Index has plunged 49 percent this year.

China “appreciates'' measures taken by other countries and pledged to coordinate policy to help cope with financial turmoil, Hu said. China also called for increased international cooperation to create a “fair and equitable'' global financial system and urged the International Monetary Fund to increase its surveillance, according to a statement from the Ministry of Finance.

A draft agreement from summit leaders on the financial crisis echoed China's wishes, saying the IMF should “play a critical role'' in assisting countries affected by the crisis, according to a copy published by Reuters.

China has also agreed with 10 Southeast Asian nations, along with Japan and South Korea, to finalize a proposed $80 billion fund to shore up Asian exchange rates by the end of the year, Surin Pitsuwan, Secretary General of the Association of Southeast Asian Nations, said in an interview with Bloomberg Television freecreditreport.

China's Response

The ASEM meeting is one of several in the coming weeks that will focus attention on China's response to the crisis.

President George W. Bush has invited leaders from the Group of 20 industrialized and developing nations — including China - -to attend a Nov. 15 summit in Washington, 11 days after the U.S. presidential election.

Finance ministers from the Asia-Pacific Economic Cooperation group gather in Trujillo, Peru, starting Nov. 6. APEC's heads of state get together in Lima on Nov. 22. The G- 20's finance ministers and central bank governors convene in Sao Paulo beginning on Nov. 8.

Thailand has proposed that China ease currency-conversion restrictions to facilitate the pooling of reserves and create a $350 billion fund to protect the region's currencies and buy stocks and bonds, said Thailand's Deputy Prime Minister, Olarn Chaipravat, in an interview in Bangkok on Oct. 22.

“The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, relative to anybody, to be the rightful and anointed convertible currency of the world,'' he said.

Crisis Lessons

Lessons from the Latin American debt crisis and Asian financial crisis are that mechanisms must be put in place rapidly to aid vulnerable markets, and China is one of the few countries with resources to play a leadership role, wrote Citigroup Inc. Senior Vice Chairman William Rhodes in the Financial Times.

China will be forced to take proposals from other Asian countries seriously, said Steve Tsang, a fellow in modern Chinese studies at St. Anthony's College, Oxford, U.K.

“If the region is financially destabilized, it will have more of an impact on China'' than the banking crisis in the U.S. and Europe, where a slowdown in consumer spending may choke off demand for Chinese products, Tsang said.

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After easing the financial-market panic by committing trillions of dollars to shore up their banking systems, governments are broadening their focus to buffering its economic aftershocks.

U.S. lawmakers are moving toward the second fiscal stimulus bill this year and Japanese Prime Minister Taro Aso is set to cut income taxes. In Europe, Britain's Gordon Brown plans to spend more on schools, Italy's Silvio Berlusconi looks to enact tax breaks for manufacturers and Angela Merkel of Germany mulls tax rebates. French Prime Minister Nicolas Sarkozy today lifted a tax on business investment until the start of 2010

“Having taken action on the banking system, we must take action on the global recession,'' Prime Minister Brown told U.K. lawmakers yesterday. “No country can insulate itself.''

Politicians are acknowledging the worst still lies ahead for their economies and their own electoral fortunes unless they act to cushion growth. World leaders will meet in the U.S. on Nov. 15 to review progress in combating the financial crisis and how to avoid a repeat of it.

The cost of borrowing money among banks has fallen after authorities in the U.S. and Europe acted to take stakes in their biggest banks as global stocks plunged and lending seized up. The euro interbank offered rate, or Euribor, that banks charge each other for three-month loans fell 2 basis points to 4.92 percent today, the lowest level since June 5, according to the European Banking Federation.

`Meltdown' Averted

“A global meltdown has been averted and governments, while implementing their respective rescue plans, should now turn their attention to the economy and limit the effects of a global recession,'' said Geoffrey Yu, a London-based currency strategist at UBS AG.

Tensions are easing too late to prevent companies and consumers from retrenching. Economists at Deutsche Bank AG expect the Group of Seven economies to contract 1.1 percent next year, the worst since the Great Depression. Even with emerging markets lending support, they predict the weakest global growth since the 1980s.

“As growth slumps, fiscal policy should turn sharply expansionary,'' said Thomas Mayer, Deutsche Bank's co-chief economist in London.

U.S. lawmakers are devising new spending plans after Federal Reserve Chairman Ben S. Bernanke endorsed the idea on Oct. 20 and the Bush administration dropped its opposition. The new push will aim to extend jobless benefits, fund infrastructure projects and help cash-strapped regional governments, according to House Budget Committee Chairman John Spratt.

Fading Fillip

The effect of measures totaling $168 billion that U.S. lawmakers passed in February has faded after they gave the economy a fillip in the second quarter.

Aso, with an election nearing, will next week unveil the government's second stimulus program since August. The plan will probably include income-tax cuts, deductions for people with home loans and an extension of breaks on capital gains, say economists.

European governments may bend their own rules that cap budget deficits in a bid to save their economies.

Brown's U cash advance in one hour.K. government will next month step up spending on housing, energy and small businesses, while bringing forward construction projects on schools and hospitals, say ministers including U.K. Chancellor of the Exchequer Alistair Darling.

German Budget Balance

Italian Prime Minister Berlusconi's government is indicating it will enact tax breaks for carmakers and appliance manufacturers. German Chancellor Merkel, who had focused on returning her budget to balance, is considering a 15 billion- euro ($19.3 billion) package of tax rebates. Sarkozy said from today “any new investment made by companies'' in France will be tax-free.

Emerging markets, the growth engines of the global economy, are also looking for remedies to fading expansions.

China's State Council on Oct. 21 cut taxes for exporters and approved construction programs including new expressways and hydro-electric power stations. Thailand's Deputy Prime Minister Olarn Chaipravat and Jun Kwang Woo, chairman of South Korea's Financial Services Committee, said in separate interviews on Oct. 21 that their governments may ease fiscal policy.

Governments may prove more powerful than central bankers in the current environment, said Julian Jessop, chief international economist at Capital Economics Ltd. Lower interest rates are less effective when the financial system is frozen and have a lagging effect at the best of times, he said.

Fewer Obstacles

Governments also have fewer obstacles than usual, Jessop said. Public borrowing is unlikely to “crowd out'' other spending given that consumers and companies are cutting back, while the inflationary byproduct of budget deficits will offset deflationary forces such as cheaper fuel and rising unemployment, he said.

“The greater use of discretionary fiscal policy will be an increasingly important global theme over the coming year,'' said Jessop, a former U.K. Treasury economist.

There are some barriers to how far governments can go, and in the longer term investors may punish those running the largest budget deficits, said Robert Lind, chief economist at ABN Amro NV. He calculates that among rich countries Finland, Sweden, Luxembourg and New Zealand have the greatest capacity to spend, while the U.S., U.K. and Japan have the least.

Biggest Post-War Deficit

The U.K. this week posted its biggest six-month budget deficit since World War II, while the annual deficit in the U.S. could exceed $1 trillion for the first time. In contrast, economies which have enjoyed commodity booms such as Australia or China have budget surpluses and currency reserves to tap.

For now, Lind said governments are rightly invoking the spirit of economist John Maynard Keynes, who died in 1946 after a career advocating activist government as the best solution to slumps such as the Great Depression.

“More government intervention should help to contain the severity of the economic downturn,'' said Lind. “We are all Keynesians now.''

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Iceland's government is “very close'' to a rescue deal with the International Monetary Fund that may also include financial help from Nordic neighbors and Japan, Industry Minister Oessur Skarphedinsson said.

The fund is preparing a plan to present to the government, which is also seeking a loan from Russia, Skarphedinsson said in a telephone interview from Reykjavik yesterday. The Financial Times and New York Times reported that the rescue will amount to $6 billion.

Iceland needs aid from the IMF and Nordic countries after the collapse of its banking system froze its foreign-exchange market, making it hard for importers to finance purchases. Glitnir Bank hf, Landsbanki Islands hf and Kaupthing Bank hf imploded with debts of $61 billion, or as much as 12 times the size of the economy.

“It's clear from our diplomatic contacts that if and when an agreement is made between the IMF and Iceland, then our neighbors would be quite willing to sail in their wake,'' Skarphedinsson said. “We in fact have confirmation of what I would label quite generous lending facilities.''

Norway, Sweden and Denmark would probably follow any accord with the IMF, with Japan also a candidate to provide the Atlantic island with aid, he said.

“We are part of the Nordic family,'' Skarphedinsson said. “It's really stating the obvious to say that definitely the Nordic countries would be among those that would seek to assist us through this crisis, when and if we go to the IMF.''

Nordic Family

The central banks of Denmark, Norway and Sweden in May provided Iceland with a euro swap facility worth a total of 1.5 billion euros ($2 billion). The central bank of Iceland has so far drawn on 400 million euros of that.

Skarphedinsson declined to comment on the Financial Times report that said $1 billion will come from the IMF and the remainder from Nordic governments and Japan. The New York Times said Russia will make a contribution.

The chief press officer at Sweden's central bank, Britta von Schoultz, declined to comment. Norges Bank head of communications said she wasn't “aware of'' any agreement with Iceland linked to a possible IMF deal. Calls made to Danish central bank spokeswoman Louise Buchter weren't immediately returned.

`Good Neighbor'

Swedish Finance Minister Anders Borg said his government was in discussions with Iceland.

“We will try to be a good neighbor,'' he told reporters in Berlin yesterday. “But eventually this is up to Iceland because they have to get into an IMF program, and that is an essential part of them re-establishing themselves.''

Japanese Finance Minister Shoichi Nakagawa said at a news conference today that he hadn't heard whether the IMF or Iceland asked his government for aid no fax payday advances. Nakagawa told his Group of Seven counterparts in Washington this month that Japan is ready to contribute to the IMF's emergency lending program.

“Japan wants to show its initiative in the global response to growing financial risks,'' said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo.

Iceland's opposition leader Steingrimur Sigfusson criticized the government's handling of the crisis, calling for better economic management.

“We know what to do if we have an earthquake or a natural catastrophe, we put up a control center, much the same as a country does if it has a war on its hands,'' Sigfusson said. “But the government hasn't done this so the management has been too weak.''

3 Cents

Bonds of Iceland's three biggest banks are on sale for as little as 3 cents on the dollar after the government began a restructuring that may leave debt investors with nothing, according to broker KNG Securities LLP.

The three lenders have together amassed debt equivalent to about 12 times the size of the economy, according to Bloomberg data. The government has yet to provide a clear plan on how that debt will be repaid since taking control of the banks. Glitnir and Kaupthing have already missed making bond payments.

The failure of banks on the island, with a population of only 320,000, is affecting investors and depositors across the globe. Kaupthing is poised to become the first European bank to default in Japan's samurai bond market after investors said the Icelandic lender missed a coupon payment. Kaupthing now has a seven-day grace period to honor the obligations.

“The samurai bond default is raising concerns among Japanese banks about whether more will arise and where they might arise,'' said Dai-Ichi Life's Kumano. That said, he added, “I'm not sure how much this funding to Iceland would reduce the chances of more defaults.''

Shrinking Economy

Iceland's economy may contract as much as 10 percent, according to Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. The central bank on Oct. 15 cut the benchmark interest rate by an unprecedented 3.5 percentage points to 12 percent, indicating policy makers have given up trying to control inflation. Prices may surge as much as 75 percent in coming months, Christensen estimates.

A nation that was ranked the fifth-richest in the world per capita in the United Nations 2007/2008 Human Development Index is now facing shortages of imports including food and clothing. The central bank on Oct. 10 called on commercial lenders to prioritize foreign-currency transactions to cover payment for essential imports such as food, fuel and medicine.

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Australia will give pensioners, home buyers and families A$10.4 billion ($7.3 billion) in a spending package to boost the economy as the global financial crisis freezes credit and slows growth.

Prime Minister Kevin Rudd will use half the government's estimated budget surplus to encourage consumer spending and bolster the economy, which grew at the slowest pace in more than three years in the second quarter as the housing market slumped, retail sales dropped and stock markets tumbled.

“This strategy will strengthen the national economy and support Australian households, given the risk of a deep and prolonged global economic slowdown,'' Rudd told reporters in Canberra today.

The spending package follows moves this week by Rudd and his Treasurer Wayne Swan to guarantee all deposits and “term wholesale funding'' among the nation's banks. They also doubled the government's investment in residential mortgage securities to A$8 billion in a bid to unlock credit. Australia's central bank pre-empted global interest-rate cuts last week.

“This package could boost economic growth by 0.9 percentage point in the fourth quarter of this year and the first quarter of 2009,'' said Riki Polygenis, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Stocks Surge

The Reserve Bank of Australia in August said the economy would expand 2 percent in 2008, slowing from 4.3 percent in the previous calendar year.

Australian stocks surged for a second day, led by banks, energy and resources companies, on speculation U.S. measures to rescue the financial system will help revive the global economy. The benchmark S&P/ASX 200 Index has gained 10 percent this week, rebounding from its worst week since 1987.

The government will spend A$4.8 billion on cash payments to the elderly, A$3.9 billion on one-off handouts to families and A$1.5 billion on increased grants to first-home buyers, Rudd said. It aims to boost consumption and investment as financial turmoil slows job growth and the A$1 trillion economy.

Rudd will fund the spending from the 2008-09 budget surplus, forecast in May at A$21.7 billion. Today's measures will leave a “comfortable'' surplus, he said.

In December, single pensioners will get a A$1,400 payment and couples a A$2,100 bonus under today's package. That will flow to 4 million pensioners, Rudd said.

Home-Buyer Grants

A first-home-buyer's grant will double to A$14,000 for existing houses and triple to A$21,000 for newly built dwellings, a benefit to go to some 150,000 people.

About two million low-income families will receive a A$1,000 payment for each child under their care. The government also will fund an extra 56,000 training places in the workforce to boost employment.

European nations have committed 1.3 trillion euros ($1 guaranteed approval cash advance loans.8 trillion) to guarantee bank loans and take stakes in lenders amid the global credit crisis. Britain took majority stakes in Bank of Scotland Group Plc and HBOS Plc as a global lending freeze threatens to push the world into recession.

The U.S. will spend $700 billion buying toxic bank debt and possibly recapitalize banks. Federal Reserve Chairman Ben S. Bernanke led co-ordinated interest-rate cuts around the world last week. The Reserve Bank of Australia earlier cut its benchmark rate by 1 percentage-point to 6 percent, the biggest reduction since a recession in 1992.

Spending Contracts

The RBA will cut its overnight cash rate target by 50 basis points at its next meeting on Nov. 4, according to a Credit Suisse index based on overnight swaps trading.

Australian home-loan approvals dropped in August to a seven-year low, cited as one of the reasons Reserve Bank Governor Glenn Stevens reduced rates to the lowest in almost two years. The rate cut reduced monthly payments on an average A$250,000 mortgage by almost A$140.

The construction industry contracted at a record pace in September as work was cut on commercial and apartment buildings. Building work has been shrinking for seven months.

Spending by households contracted by 0.1 percent in the second quarter, the first decrease since 1993, slowing gross domestic product to 0.3 percent from the previous three months.

“This is a significant fiscal stimulus,'' opposition Liberal-National coalition leader Malcolm Turnbull told reporters in Canberra after today's package was announced. “It will provide stimulus to the economy, that's for certain.''

Stocks surged across Asia today on more expected action by the U.S. to help credit markets.

`Dramatic Change'

The U.S. government will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, people briefed on the matter said.

The S&P/ASX 200 Index of Australian stocks rose 3.7 percent as of 2:38 p.m. in Sydney. Australia & New Zealand Banking Group Ltd. led financial stocks higher, surging 6.1 percent. BHP Billiton Ltd., the world's largest mining company, gained 3.8 percent.

“Things have changed dramatically in the past couple of weeks,'' Treasurer Wayne Swan, who today returned to Canberra from the U.S., told reporters in Canberra.

Slower global growth has slashed prices for commodity exports that have fueled Australia's 17-year economic boom.

The International Monetary Fund's World Economic Outlook last week forecast global economic growth will slow to 3 percent in 2009, a world recession under the fund's informal definition.

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Japan and Australia's central banks pumped more than $11 billion into money markets, seeking to ease near-record borrowing costs that threaten to tip regional economies into recession.

The Bank of Japan injected 1 trillion yen ($9.8 billion) and the Reserve Bank of Australia added A$1.815 billion ($1.3 billion). The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans stayed near a nine-month high and the Tokyo interbank rate was unchanged at the steepest this year. The Japan Libor-OIS spread, a gauge of cash scarcity among foreign banks seeking yen, rose to a record.

Interbank rates have jumped as lenders hoard cash, sheltering from bank failures and plunges in stock and commodities markets. The Nikkei 225 Stock Average dipped below 10,000 for the first time since December 2003 as Asian shares slumped for a fourth day, extending an equities rout that erased more than $2 trillion from global equities yesterday.

“There's a massive asset bubble deflating and it just encompasses everything,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. “We've been living in a dreamland and that dream has ended.''

Banks increased deposits held at the Reserve Bank of Australia by A$92 million to A$9.493 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site. Those deposits averaged A$1.7 billion last year.

Money held at the BOJ by banks and other financial institutions rose 1.23 trillion yen to 7.22 trillion yen yesterday.

`Hoarding Cash'

The BOJ has pumped about 23 trillion yen into the system over the past three weeks, the most in at least six years, and Australia's central bank is adding twice the daily average injected last year as banks store cash after governments in Europe and the U.S. acted to prevent the collapse of six financial institutions in the past two weeks.

“Despite central banks pumping liquidity into the system, banks are either hoarding cash or putting it into treasury bills,'' said Ong Hock Ann, a money-market dealer at ING Asia Private Bank Ltd. in Singapore. “It's a question of confidence and trust. There is money, but money is not flowing to the right channels.''

The world economy is sliding into its first recession since 2001 as the credit crisis hammers consumers and companies, economists at JPMorgan Chase & Co. and UBS AG said yesterday.

Rate Cuts

Economists predict central banks will cut interest rates as growth concerns outweigh inflation worries. Those at UBS predict the Fed will halve its benchmark rate to 1 percent by April and the European Central Bank will cut its main rate to 3 percent from 4.25 percent by the end of next year.

Australia's central bank today slashed its cash target rate to 6 percent from 7 percent, the biggest reduction since 1992 and double the half-point cut forecast by economists in a Bloomberg News survey (500 fast cash).

Australian banks' borrowing costs were little changed after today's cash injection, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 86 basis points, or 0.86 percentage point, from 88.3 before the RBA operation. The gap has averaged 45 points this year.

Banks hold cash in RBA exchange settlement accounts, on- call deposits at the central bank that receive interest at 0.25 percentage point below the central bank's benchmark rate.

Default Risk

The cost of protecting investors from Australian corporate bond defaults increased to a record.

The Markit iTraxx Australia index rose 34 basis points to 245, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004. Sydney trading desks were closed yesterday for a holiday.

The Markit iTraxx Japan index rose 9 basis points to 207, Morgan Stanley prices show.

“Credit markets remain extremely weak and fragile,'' Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. “We expect the market to remain very volatile and thin in the next few days.''

Damage from the credit crunch accelerated over the past month as Lehman Brothers Holdings Inc. and Washington Mutual Inc. collapsed, the U.S. government took control of Fannie Mae, Freddie Mac and American International Group Inc., and Merrill Lynch & Co. and Wachovia Corp. were purchased by rivals.

Cash Auctions

The U.S. dollar Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, stood at 287 basis points today, after touching 298 points yesterday. It was at 129 basis points two weeks ago and 81 basis points a month ago. The Japanese Libor-OIS spread widened to a record 61.05 basis points.

Japan's central bank today said it offered $20 billion in three-month loans to 40 financial institutions as part of a currency swap agreement with the Federal Reserve. The operation was held for firms including Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Goldman Sachs Japan Co.

The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps, the central bank said today in a statement. The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each. The central bank will also begin paying interest on bank reserves.

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