By Dominic Whiting
HONG KONG (Reuters) - The world's economic powers came under pressure to act boldly to halt financial distress as panic selling clenched Asian markets on Friday and anxiety spread over an expected global economic recession.
With financial policy makers from the Group of Seven (G7) major industrial nations due to meet in Washington later in the day, bank bailouts, liquidity injections and interest rate cuts across the world have failed to quell investor fears.
In a bid to unfreeze bank lending and staunch massive losses in equity markets, the U.S. government is weighing guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits, The Wall Street Journal reported.
Japan's Nikkei tumbled more than 10 percent, heading for its biggest one-day drop since a 1987 crash, as the global crisis claimed its first Japanese financial institution -- unlisted Yamato Life Insurance Co., which had $2.7 billion debts and the government looked to prop up smaller banks.
The MSCI index of Asian markets excluding Japan fell 7 percent, tracking Thursday's tumble on Wall Street, and Europe's main bourses were set to open more than 7 percent lower on Friday, according to bookmakers.
South Korea's finance minister Kang Man-soo planned to plead with U.S. bankers for extended credit lines to save the country's banks from the ravages of the global crisis, while the won currency swung wildly for a second day.
Singapore said its export-dependent economy had sunk into its first recession in six years, and eased monetary policy. Neighboring Indonesia kept its stock market closed for a third day.
India, meanwhile, injected more money into the banking system.
"Politicians must be scared by now, looking at stock markets and the problems in the credit markets," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd in Hong Kong.
"Much more needs to be done," he said. "The G7 has to announce that they will provide massive capital injections and guarantees for the interbank market."
At the center of a financial crisis, now almost a month old, credit markets remained in deep distress. With banks desperate to protect capital, the interbank cost of borrowing dollars rocketed. Three-month interbank rates for dollar loans have hit their highest level of the year.
The cost of protection against defaults in Asia's sovereign and corporate debt also soared to record highs on Friday.
In the latest attempt to instil confidence in the financial system, the U.S. and Dutch governments readied on Thursday public funds to shore up the capital of banks, matching a similar move this week by Britain.
The U.S. Treasury plans to start injecting capital in U.S. banks as soon as this month, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.
That partial nationalization of American banks would represent an enlarged role for the U.S. government as the lender and investor of last resort.
U.S. policy had focused on a plan to buy banks' distressed assets, but many analysts say a move to shore up banks' capital would be a more direct way to break a logjam in credit markets that has shut down new borrowing for consumers and businesses.
But U.S. stocks slumped more than 7 percent on Thursday on fears that credit markets would stay frozen, paralyzing the world's financial system and slowing economies to a standstill.
U.S. stocks have now lost $2.3 trillion this week and $8.3 trillion over the past year, according to the Dow Jones Wilshire 500, the broadest measure of U.S. equities available.
In Japan, escalating bankruptcies in the property sector and among small businesses, along with fears of a global recession, have dragged the country's export-dependent economy into crisis.
The government said it may revive a bank rescue law from a 1990s crisis, with one report suggesting Tokyo may set up a $100 billion fund to prop up smaller lenders.
"(Share prices) have fallen to the level where they can hurt firms' funding. So I have instructed the ruling coalition to come up with steps," Japanese Prime Minister Taro Aso told reporters.
Government ministers and analysts were quick to play down the risk of contagion from the failure of Yamato Life Insurance. But trust in the financial system was in short supply.
"This is panic," said Takashi Ushio, head of investment strategy at Marusan Securities in Tokyo. "Paulson will have to definitely promise the injection of public funds, and then he'll have to make the timing of this very clear."
The punishing decline in global stock markets has added to pressure on policy makers to do more to stem the crisis -- even after approval of a $700 billion U.S. bailout fund.
This week, central banks from Europe and the United States to China, South Korea and Taiwan chipped in to help by slashing interest rates, as fears of inflation recede into worries about economic growth.
On Friday, India's central bank also said it would ease monetary policy by cutting bank's cash reserve requirement to 7.5 percent from 9.0 percent -- to release about $12.2 billion into the banking system.
G7 finance ministers and central bankers meet in Washington on Friday amid expectations that the group will present a united front on policy to contain the crisis. An International Monetary Fund/World Bank meetings follow this weekend in New York.
"Politicians don't have legal power to announce what needs to be announced, but at least they can commit to working with parliaments," said CFC Seymour's Kowalczyk.
"Political will is something that comes at a slower pace than market developments."
(Additional reporting by Reuters bureaus around the world)
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