U.S. Treasury Secretary Timothy Geithner flew to Europe on Wednesday to press for united action to tackle a deepening debt crisis that has rekindled fears of a return to recession and sent global stocks tumbling.
Asian equity markets rallied from nine-month lows but the euro remained under pressure with sentiment downbeat as costs for banks to borrow dollars from each other reached the highest levels in 10 months.
Investors are not confident that measures so far, including Germany's unilateral ban on some financial trades, austerity plans by indebted euro zone members or even a 750 billion euro ($926 billion) rescue fund will be enough to prevent Europe's woes from derailing the global recovery.
"I think we all have to understand that the world economy is very lame and it is getting everybody nervous that the problems we are seeing in Greece (and) Europe will not be isolated in Europe," Microsoft Chief Executive Steve Ballmer said at a company event in Singapore.
Geithner, in London after a trip to China, will "discuss the economic situation in the region and the measures being taken to restore global confidence and financial stability and to promote continued recovery," the U.S. Treasury said in a statement. He will also urge European officials to conduct bank stress tests, CNBC reported. The Treasury declined to comment.
Any stress tests, however, would have to differ from those conducted by U.S. regulators in the spring of 2009, because Europe lacks a huge bailout fund like the $700 billion Troubled Asset Relief Program to plug any capital deficiencies found, CNBC said.
Geithner and other Treasury officials routinely cite the U.S. stress tests, which helped open the door for private capital to return to the banking sector, as calming intense market turmoil caused by the financial crisis.
GERMAN BANS "COUNTER-PRODUCTIVE"
Geithner will meet with Britain's new finance minister, George Osbourne and Bank of England Governor Mervyn King before heading to Germany for meetings with European Central Bank President Jean-Claude Trichet and German Finance Minister Wolfgang Schaeuble.
One senior U.S. Treasury official said Washington was unhappy with Germany's decision to go it alone in banning some types of speculative trading as it considers the measures counter-productive.
In fact, Germany on Tuesday proposed extending restrictions on speculative short-selling trades to include all shares, a government source said.
Last week, the euro area's biggest country imposed a ban on naked short-selling of shares in top financial firms and euro government bonds and using credit default swaps for speculation.
Also on Tuesday, Italy's cabinet approved a multibillion-euro package of budget cuts designed to slash the government's deficit to beneath the EU ceiling of 3.0 percent of GDP by 2012, a government source said.
A draft of the package obtained by Reuters included a four-year freeze on public sector salaries, and a reduction in state personnel by replacing only one in five of those who leave. Italy reluctantly joined Greece, Spain and Portugal in trying to slash budget deficits but the downside could be slower economic growth.
"There is indeed a risk that, under market pressure, some countries overdo austerity," Olivier Blanchard, chief economist of the International Monetary Fund, said in a newspaper interview. "That would be a mistake."
CAUTION PERVASIVE
Reflecting the challenges facing the euro zone, the region's common currency languished near multi-year lows against the dollar and yen.
Stocks however saw some reprieve from weeks of selling as investors looked for bargains. The MSCI index of Asia Pacific stocks outside Japan rose 1.6 percent, helped by a late rally on Wall Street overnight.
But since peaking in April at a 22-month high, Asian stocks have fallen 18 percent, just short of a 20-percent fall that usually defines a bear market.
Tighter funding in money markets was a key concern, reminding investors of the freezing in the interbank loan market that followed the collapse of Lehman Bros in 2008 and played a significant role in the financial crisis that followed.
"Doubts and caution pervade the market. There are doubts whether southern European countries are the only ones with debt problems," said Suh Dong-pil, a market analyst at Hana Daetoo Securities in Seoul.
Worries that the European debt crisis could engulf banks, fuelled last weekend by a Spanish takeover of a small savings bank, have pushed the global benchmark borrowing rate of three-month LIBOR to a 10-month high.
Money markets are "pricing in for a credit crunch," said Michael Pond, Treasury strategist at Barclays Capital in New York. "A crisis of confidence is developing once again."
The U.S. Federal Reserve could cut the rate it charges the European Central Bank for dollar supplies via swaps if the debt crisis worsens, the Wall Street Journal said.
Few markets have escaped the turmoil.
The Reuters-Jefferies Commodities index has tumbled more than 10 percent so far in May due to concerns that Europe's debt woes will hurt global demand for raw materials such as industrial metals, oil and agricultural goods.
Global miner Rio Tinto, however, gave an upbeat outlook on Wednesday, particularly on iron ore and aluminium, cheering investors in the stock and the beaten down Australian market.
"The outlook for global iron ore remains very positive and growth fundamentals remain the same as before the financial crisis, dominated by the rise of China," Chief Executive Tom Albanese told the miner's annual meeting in Australia.
