The United States tried to persuade private investors on Monday to take on huge sums in banks' toxic assets, while the IMF warned of a drastic rise in unemployment which might threaten some countries' democracy or even provoke war.
Financial markets rose on the U.S. offer of financing for investors, aimed at unburdening banks of up to $1 trillion in the toxic assets which are blocking lending and worsening the recession. Shares soared in Citigroup, which is likely to be a major beneficiary of the plan.
China helped the mood, promising to keep buying U.S. government debt and offering to help fund International Monetary Fund bailouts for stricken countries. But Beijing also proposed a sweeping overhaul of the monetary system, saying an IMF accounting unit could replace the dollar over time as the world's main reserve currency.
U.S. Treasury Secretary Timothy Geithner said something had to be done to clean up the banking sector and restore lending.
"Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience," he wrote in Monday's Wall Street Journal, referring to a decade of economic stagnation in Japan in the 1990s.
Geithner, under fire for his handling of the economic crisis and a row over big bonuses in the U.S. financial industry, will reveal details of the plan at 1245 GMT.
An Obama administration official said the Treasury plans to pitch in with $75 billion to $100 billion to launch public-private partnerships,
The money, taken from a $700 billion financial rescue fund which Congress approved in October, would be put alongside private capital and then leveraged up to $500 billion, or possibly double that amount.
MORE UPBEAT
Last month financial markets fell after the U.S. administration offered only a bare outline of the proposed public-private partnerships.
This time the reaction was more positive. Japan's Nikkei average rose 3.4 percent to its highest close in seven weeks. The pan-European FTSEurofirst 300 was up 1.8 percent, with financial sector stocks the major gainers.
Shares in troubled bank Citigroup jumped 22 percent in pre-market U.S. trade. The dollar fell broadly as the plan encouraged investors to move out of the perceived safety of the U.S. currency.
But questions remained about how the toxic assets such as mortgage-backed debt would be priced, as trading in them ground to a halt last year.
"If the U.S. authorities actually succeed in buying up to $1 trillion of 'toxic assets', it would be considered a significant step," said Mamoru Yamazaki, chief economist with RBS Securities in Tokyo. "However, markets will be disappointed if the programs do not move forward due to problems regarding how the asset value is measured."
DIRE SITUATION
In the real economy the outlook was worse than ever. "Bluntly the situation is dire," IMF Managing Director Dominique Strauss-Kahn said. As the crisis spills over into developing countries, millions of people will be pushed back into poverty and hardship, he told a meeting at the International Labour Organisation.
"All this will affect dramatically unemployment and beyond unemployment for many countries it will be at the roots of social unrest, some threat to democracy, and maybe for some cases it can also end in war," he said.
The prerequisite for success was the restoration of a healthy financial sector, he said. Although bailing out banks was politically unpopular, businesses and households could not survive without a working banking system.
The enormous cost to the U.S. government of stimulating the economy and bailing out banks has raised questions about its top-level credit rating. But China offered a little relief, saying it would continue to invest part of its huge foreign currency reserves in U.S. Treasury bonds.
"Investing in American Treasuries, as an important part of our foreign exchange reserve management, will continue," Hu Xiaolian, a vice governor of the People's Bank of China, told a news conference on China's preparations for next month's G20 summit in London.
PBOC chief Zhou Xiaochuan proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world's main reserve currency by the IMF's Special Drawing Right, now an accounting unit.
"The desirable goal … is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies," he added.
