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TOPWRAP 7-ECB cuts rates, global bank crisis deepens

Published 01/15/2009, 10:08 AM
Updated 01/15/2009, 10:16 AM
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* European Central Bank cuts interest rates by half point

* JPMorgan posts 76 percent fall in quarterly profit

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

* Citigroup shares plunge, Japan's MUFG flags losses

* Weak Japan data point to risk of deflation

(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.

The ECB matched the lowest rate in its 10-year history by cutting its benchmark interest rate to 2.0 percent, which still lags the 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.

"We are, after today's decision, at 2 percent. We didn't say that it was now the limit and we would not move any further. We didn't say that," ECB President Jean-Claude Trichet told reporters.

He said that a further rate cut was likely to be considered in March rather than February, telling the news conference the "next important rendezvous will be in March."

Trichet said the ECB had cut rates as it was "anticipating future bad news that we expect coming from the real economy."

Euro zone inflation fell to 1.6 percent in December, well below the ECB's target of just below 2 percent.

In Japan, data flagged the risk of deflation as November core machinery orders hit a two-decade low, tumbling a record 16.2 percent on the month.

As rate cuts and rescue packages rolled on, including a promise from French President Nicholas Sarkozy to use "a lot of money" to help his country's carmakers, the banking sector at the centre of the storm revealed fresh signs of trouble.

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.

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

Japan's biggest bank, Mitsubishi UFJ Financial Group, said it lost at least $3.2 billion on its securities portfolio in the third quarter.

Japanese banks had little exposure to the risky end of the U.S. home loan market which triggered the financial crisis but they have since been battered by a plunge in share prices.

Banks that were strong enough to swallow fallen rivals are also creating concern, with Bank of America close to receiving billions of dollars of support from the U.S. government, a source familiar with the matter told Reuters.

BoA bought troubled investment bank Merrill Lynch.

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

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.

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 was flat after the ECB cut, up 0.04 percent as of 1422 GMT. U.S. stocks slipped at the open on Thursday.

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 financial crisis 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.

A bigger than expected jump in initial U.S. weekly unemployment benefit claims for November provided further evidence that the year-long recession was deepening.

In Japan, big firms carmaker Toyota and electronics firm Sony are 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/Jason Neely; Editing by Ruth Pitchford and Richard Hubbard)

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