October 29, 2008	Wednesday	Shawwal 29, 1429

LONDON, Oct 28: The global financial system could lose $2.8 trillion to the credit crisis, the Bank of England (BoE) said on Tuesday.

The BoE said the work so far in containing the crisis should calm the banking system but was cautious about the impact on the wider economy. It projected losses globally at $2.8 trillion.

“The instability of the global financial system in recent weeks has been the most severe in living memory,” said deputy governor John Gieve. “And with a global economic downturn under way, the financial system remains under strain.”

The BoE is expected to cut interest rates next week, a move the European Central Bank and the US Federal Reserve are also expected to take to try to encourage more spending in economies increasingly fearful of a long, deep recession.

The consensus among Fed watchers is for a half-point cut in overnight rates to 1 per cent, the lowest level since June 2004.

It has already cut the benchmark federal funds rate to 1.5 per cent from 5.25 per cent over the past 13 months.

It will announce its decision on Wednesday. The ECB and Bank of England are expected to cut rates on Thursday next week.

Faced with a funding squeeze and a sharp economic downturn across much of the industrialised world, major companies joined banks in the queue for government aid.

US automakers General Motors and Chrysler sought government cash for a merger, South Korean banks tapped a Federal Reserve funding window, Russia was in talks with China for export-backed loans for its companies and Kazakhstan pumped $5 billion into its banks.

The Japanese banking system, which largely escaped the fallout from US mortgage defaults last year, had invested in the stock market and the three largest lenders are looking to replenish capital lost on the bourse.

Tokyo banned naked short selling, bringing the move forward by one week. Naked short selling allows traders to effectively sell stocks they do not own and without borrowing them first in the hope they will profit by buying stocks back at a lower price.“Similar restrictions have already been put in place in the United States and Europe but Japan has lagged behind,” Finance Minister Shoichi Nakagawa said. “I found a lag of a few days is critical for the Tokyo stock market.”

The US government cobbled together a $700 billion plan to bailout Wall Street last month, after mortgage defaults and credit write-downs wrecked lenders and insurers.

Sixteen banks have accepted more than $33 billion of US government cash, part of a $250 billion recapitalisation programme launched this month.—Reuters