Central banks, governments try to contain crisis

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STOCKHOLM — European governments sought to contain the deepening world financial crisis on Wednesday, with Britain stepping in to help its hard-pressed banks and Russia shutting down its biggest stock market for two days. But the greatest relief to markets came from a coordinated rate cut from leading world central banks.

After the central banks — including the U.S. Federal Reserve, the European Central Bank and the Bank of England — stepped in and cut their official rates by half a point, markets recovered some of their earlier lows. The British FTSE was down 2.5 percent, the Frankfurt DAX 30 blue-chip index was down 3.1 percent and the Paris CAC-40 was off 2.6 percent. All had been deeper in the red before the coordinated rate cut.

The British Treasury announced it would be investing up to 50 billion pounds ($87.5 billion) in exchange for stakes in the country's largest banks and building societies, widen the amounts available through an existing short-term bank credit program 200 billion pounds, and guarantee 250 billion pounds (US437.5 billion) worth of short and medium-term debt.

The partial nationalization of some of the country's leading banks was supposed to put them on a "sounder footing", said Prime Minister Gordon Brown, after Tuesday's precipitous collapse in banking stocks, most notably Royal Bank of Scotland PLC and HBOS PLC, shook already weak confidence in the financial system.

Brown and Treasury chief Alistair Darling hope that the package of measures will eventually give banks more confidence to start lending to each other.

"This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," Prime Minister Gordon Brown told a news conference.

Darling said the government was "absolutely not" seeking to take control of the banks, which will continue to operate as commercial operations, albeit with government help in restructuring.

Though the government package has been broadly welcomed by politicians of all colors and been credited as bold, in terms of its objectives, it signifies an end to the hands-off regulatory framework that Britain's financial system has been operating in for the better part of twenty years.

"If ever an indication were needed that the Anglo-Saxon capitalist model were in trouble, a government bailout to Britain's banking sector provides it in spades," said Peter Dixon, an economist at Commerzbank.

Tiny Iceland plunged further into financial crisis on Wednesday as it scrapped plans to nationalize a major bank, instead placing it into receivership, and abandoned attempts to put a floor under its falling currency by fixing the exchange rate. Adding to Iceland's woes, the British government said that it planned to sue over lost deposits held by tens of thousands of Britons with Icelandic bank accounts.

The global credit crisis has exacted a heavy toll on Iceland, where the banking sector dwarfs the rest of the economy thanks to a stock market boom in the mid-1990s.

Those heavily exposed banks are now putting the entire country at risk, with Prime Minister Geir H. Haarde warning of "national bankruptcy."

Europe's stock exchanges opened sharply lower in the wake of Japan's worst performance since the stock market crash in 1987. The CAC-40 index in Paris suspended updates for a short time because there were too many sell orders to keep up with.

Moscow's MICEX stock exchange, where most of Russia's trading takes place, announced it is shutting until Friday after opening with steep losses. The MICEX index dropped more than 14 percent in the first half-hour of trading Wednesday.

Russia's oil-fueled economy has seen its stocks hurtle lower on the back of falling oil prices and concerns about the depth of the financial and economic woes in Europe and the U.S. That combination contributed to the worst-ever day of trading for Russian shares on Monday.

With coordinated government action proving to be difficult, governments around the world are beginning to look around for someone to blame.

France's Finance Minister Christine Lagarde appeared to put responsibility for the crisis on U.S. Treasury Secretary Hank Paulson for allowing the investment bank Lehman Brothers Holdings Inc. to collapse, while Britain's Brown said Britain will take legal action against Icelandic authorities to recover money held by British savers in U.K. branches of troubled Icelandic banks.

Lagarde told French radio that allowing the failure of a major bank like Lehman was like letting a "domino" fall, which ran the risk of the entire interlocking financial system collapsing.

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Associated Press writers David Stringer and Emily Vencat in London; Catrina Stewart in Moscow; Emma Vandore in Paris, and Jane Wardell in Reykjavik contributed to this report.

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