Australia woes stoke global recession fears

SYDNEY (AFP) – The first contraction in Australia's economy for eight years sent shockwaves through markets Wednesday, after the US unveiled a credit drive to stem a crisis that shows no sign of relenting.

Dashing hopes Australia could avoid the global recession, shock figures showed the economy contracted 0.5 percent in the December quarter, well below market expectations of 0.1 percent growth.

Ending a long run of expansion on the back of a China-driven resources boom, the figures came despite government attempts to kick start the economy with two stimulus packages worth more than 50 billion dollars (32.5 billion US).

Treasurer Wayne Swan said the figures were a "sobering reflection" of an extremely difficult global environment that was likely to get worse before it improves.

"Although the Australian economy has held up better than most other economies, the inevitable impact of the global recession is clearly evident in today's data," he said.

The news sent currency and share markets plummeting, with the Australian dollar plunging 0.65 US cents to 63.15 US cents immediately after the announcement and the benchmark SP/ASX200 share index closing 1.6 percent lower.

Pressurised world markets earlier hit multi-year lows amid worries about the world economy, exacerbated by a huge global rout earlier in the week.

Japanese share prices slipped 0.82 percent in morning trade, a day after London's FTSE 100 index of leading shares shed 3.14 percent to finish at a six-year low. Tokyo later recovered on bargain-hunting to close up 0.85 percent.

Governments continued to forge stimulus efforts, with Japan's parliament passing a controversial plan to hand 20 billion dollars back to the public to fight the recession.

A 200-billion-dollar US government bid to rev up consumer lending failed to halt a slide on Wall Street which fell 0.55 percent Tuesday, after automakers reported heavy US sales declines as the deepening crisis evaporates demand.

General Motors reported a 53 percent slide, Ford sales fell 48 percent and Toyota's sales dropped 37 percent from a year earlier.

Overall sales for the US market were down 41 percent from a year ago to a weak annual pace of 9.12 million vehicles.

The Treasury and the Federal Reserve said the credit drive, which could increase to one trillion dollars, aims to break a credit crunch by buying up asset-backed securities linked to credit cards, auto loans and other types of consumer credit.

Called the Term Asset-Backed Securities Loan Facility (TALF), the programme is designed "to catalyse" credit markets that have been "virtually shuttered since the worsening of the financial crisis in October," according to a joint statement.

Ryan Sweet at Economy.com said the programme could help revive economic activity.

"If the TALF works as intended, it could become the blueprint for future programs to combat the financial crisis," he said.

As the launch was announced, Federal Reserve chairman Ben Bernanke said that this and other efforts by the central bank along with a huge stimulus programme should over time provide "solid gains" for the recession-plagued economy.

Bernanke also highlighted the failings of the banking system to steer clear from mountains of bad debt in an unusually harsh rebuke to ailing insurer American International Group, whose record fourth quarterly loss of 61.7 billion dollars helped send world markets spiralling down this week.

He told a Senate hearing that "if there's a single episode in this entire 18 months (of the financial crisis) that has made me more angry, I can't think of one than AIG."

"I think AIG exploited a huge gap in the regulatory system," Bernanke said.

Economies worldwide have been hit by the crisis sparked by so-called subprime loans in the United States, made to borrowers with weak credit histories.

The loans were resold as complicated investment instruments to banks, institutions and private investors around the world. Once large-scale defaults hit, the impact was felt worldwide.

In France, Prime Minister Francois Fillon warned on French radio that "The whole of 2009 will be a year of crisis."

The Bank of England is expected to slash its key interest rate on Thursday by half a percentage point to just 0.5 percent -- the lowest level in the bank's 315-year history, analysts said.

The European Central Bank meets on Thursday when it is expected to cut rates half a point to a record low 1.50 percent amid a chorus of complaints it has been too slow to adjust policy as the economy slumps.