Nov 26, 2008

Business - China slashes rates, EU launches stimulus plan

Jeremy Gaunt

LONDON (Reuters) - Massive stimulus plans to drive the world out of recession took center stage on Wednesday with the European Union considering a 200 billion euro boost and China announcing its biggest interest rate cut in 11 years.

The moves came on the heels of an $800 billion credit market bailout from the U.S. Federal Reserve.

Underlining the troubles facing industry from a deteriorating global economy, Toyota Motor Corp had its top-notch credit rating cut for the first time in a decade.

China's cut in banks' benchmark lending and deposit rates by 108 basis points came a day after the World Bank said Chinese growth next year would be around 7.5 percent, the slowest rate since 1990.

The People's Bank of China (PBOC) also reduced reserve requirements by 1 percentage point for big banks and by 2 percentage points for smaller banks.

"It's certainly a lot more aggressive than anything they've done recently. I think it speaks volumes about just how much China has slowed down," said Anthony Muh of AT Asset Management in Hong Kong.

The European Commission approved a package aimed at giving the sagging European economy a sharp, temporary boost with a 200 billion euro ($260 billion) spending plan across the 27-nation bloc, an EU source said.

The plan, higher than initially thought, calls for a targeted and temporary fiscal stimulus of 1.5 percent of EU gross domestic product. National measures would account for around 170 billion euros, or 1.2 percent of GDP, and EU and European Investment Bank budgets around 30 billion euros.

The Commission wants the EU's 27 countries to unite on a two-year dash for growth, even if it means breaking the region's national deficit targets.

Some EU countries were cautious. German Chancellor Angela Merkel warned EU partners against competing to produce big stimulus packages for their economies and defended her plans for Germany as policies of "measure, middle ground and reason."

Equity markets slipped over worries about the impact of huge stimulus programs on national accounts. Japan's Nikkei average shed 1.3 percent and the index of top European shares was down 1.5 percent.

FIGHTING THE SLUMP

In Cairo, European Central Bank President Jean-Claude Trichet said the bank could cut interest rates next week as long as there was evidence that inflation pressures have eased.

There is -- German inflation likely slowed for a fourth month running in November as fuel costs fell, pointing to easing price pressures in the broader euro zone, state data showed.

Trichet's comments were the latest in a series of comments from central bankers that have led to widespread expectations of earlier monetary policy ahead.

The stimulus moves in Europe and China followed Tuesday's announcement by the U.S. Federal Reserve of an $800 billion plan to buy mortgage-related debt and back consumer loans.

Under the life-support intervention, the Fed is putting $600 billion toward mortgage-related debt and securities and $200 billion to support consumers.

Authorities across the world are struggling to keep their economies from sliding deep into recession and have already pumped billions into banks, money markets and now their broader economies as well as slashing interest rates.

The Organization for Economic Cooperation and Development forecast on Tuesday that growth among its 30 member nations would contract by 0.4 percent next year, with "negative growth" in 19 countries.

Elsewhere, Indonesia approached Australia, the World Bank and other creditors to help cover its budget deficit next year, an Indonesian finance ministry official said.

CORPORATE ANGST

More evidence of the sharp global downturn's impact on business came when Fitch Ratings downgraded Toyota's long-term foreign and local debt ratings to AA from AAA, with a negative outlook.

"The negative developments in the industry are so substantial and fundamental that even the strongest player -- Toyota -- can no longer support an 'AAA' rating," said Fitch Director Tatsuya Mizuno.

On Tuesday, another casualty was mining company BHP Billiton's $66 billion bid for rival Rio Tinto. BHP blamed the financial crisis and sliding metals prices.

(Additional reporting by Reuters bureaux worldwide, editing by Mike Peacock)