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TOPWRAP 6-ECB cuts rates, global bank crisis deepens anew

Published 01/15/2009, 08:14 AM
Updated 01/15/2009, 08:16 AM
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* European Central Bank cuts interest rates by half point

* JPMorgan posts 76 percent fall in quarterly profit

* Weak Japan data point to risk of deflation

* U.S. govt close to giving Bank of America new aid-source

* Citigroup shares plunge, Japan's MUFG flags losses

(For more on the global economic crisis, click)

By Sakari Suoninen and Elinor Comlay

FRANKFURT/NEW YORK, Jan 15 (Reuters) - The European Central Bank cut interest rates by a half point on Thursday in response to a global crisis which is casting fresh doubt on the ability of top banks to survive intact.

While rates at 2.0 percent match the lowest level in the ECB's 10-year history, they pale alongside almost-zero borrowing costs in the United States and Japan, as well as a British central bank thought to be headed in a similar direction.

U.S. bank JPMorgan Chase & Co announced its quarterly profit fell 76 percent as it wrote down bad loans and set aside more money to cover credit losses at its investment bank.

It posted a fourth-quarter net profit of $702 million, down from $3 billion a year ago but markets were relieved the figures, which beat forecasts, were not worse.

"Our fourth-quarter financial results were very disappointing," Chief Executive Jamie Dimon said in a statement.

Shares in Bank of America and Citigroup, two of America's biggest banks, tumbled on Wednesday in a new crisis of confidence over whether they have enough capital to cover losses from toxic assets and global recession.

Mitsubishi UFJ Financial Group, Japan's largest bank, said on Thursday it lost at least $3.2 billion on its securities portfolio in the third quarter, hurt by its heavy exposure to Japan's languishing stock market.

Japanese banks had little exposure to the risky end of the U.S. home loan market, whose collapse prompted the worst financial crisis in 80 years, but they have since been battered by a savage downturn in share prices.

A profit warning from Germany's Deutsche Bank on Wednesday and a prediction HSBC may need fresh capital also shook confidence in two major European banks previously credited with dodging the worst of the fallout.

Citigroup plans to report quarterly results on Friday and analysts are looking for a fifth straight multibillion-dollar loss. It is also expected to provide details of a reorganisation of the company designed to ensure its survival.

Bank of America is close to receiving billions of dollars of support from the U.S. government, a source familiar with the matter said, as it tries to digest Merrill Lynch, the troubled investment bank it bought on Jan. 1.

Citigroup has already taken $45 billion in government funds while Bank of America and Merrill have received $25 billion.

MORE TO COME FROM ECB

The size of the ECB cut was as expected by the market.

With the euro zone in recession and inflation in the bloc running at just 1.6 percent, analysts said there was little impediment to further reductions.

"The ECB had ample scope to cut interest rates further," said Howard Archer at Global Insight. "At this stage, we suspect that the ECB will trim interest rates further in February and bring them down to 1.0 percent by mid-2009."

Economic malaise hung over financial markets.

The index of leading European shares turned negative after the ECB cut. U.S. stock futures pointed lower after an initial boost from JP Morgan's results.

The yen, which tends to gain from its perceived safety in times of market stress, climbed and Tokyo's Nikkei share average slipped close to 5 percent after Japan's core machinery orders fell at a record pace in November.

The crunch began in 2007, when bank lending dried up because of huge losses on U.S. home loans. It took a sharp turn for the worse with the collapse of U.S. bank Lehman Brothers last September and has now pushed much of the world into recession.

Japanese data showed core machinery orders fell a record 16.2 percent on the month in November to a two-decade low, while wholesale inflation hit a four-year low, flagging the risk of deflation.

Deflation -- when price falls and weak demand feed each other in a vicious downward spiral -- would risk turning recession into depression.

The global slowdown has hit hard in Japan, with big firms like carmaker Toyota and electronics firm Sony slashing production and cutting jobs as export orders dry up.

Nissan Motor Co the country's third-largest car maker, is set to post an annual operating loss, a company source said. The company had forecast a profit. (Writing by Mike Peacock; Editing by Ruth Pitchford)

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