World crisis deepens
U.K. bailing out banks. Global markets tumble - Nikkei sinks 9%
NEW YORK (CNNMoney.com) -- The global financial crisis escalated on Wednesday as stock markets plummeted worldwide and officials raced to put out the fires.
Investors in Japan suffered one of their worst days ever. A Russian exchange was shut down after a huge decline at the open. And a trio of European central banks announced that it was pumping more money into the system to keep banks going.
The most dramatic move was in the U.K., where the Treasury announced a plan to inject hundreds of billions of dollars into the banking system.
British Finance Minister Alistair Darling announced the program shortly before markets opened in Britain. London's FTSE 100 was down 3.9%.
"This is a major step," Darling told CNN affiliate ITN. "Never before have we been in a position where the government is actually saying to banks, 'You've agreed with us that you're going to raise more capital. If you can't do it in the normal way on the markets, we'll actually provide the funds to enable you to do that.'"
The goal of the effort, carried out in consultation with the nation's central bank and regulators, was to provide immediate relief and free up lending.
"In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity," according to a U.K. government statement. "In its provision of short term liquidity the [central] bank will extend and widen its facilities in whatever way is necessary to ensure the stability of the system."
Under the U.K. plan, the largest banks have agreed to increase their capital by $43.7 billion and the government "stands ready" to provide $25 billion if necessary.
Among the banks participating in the program are global financial leaders Barclays, HBOS and Royal Bank of Scotland.
The government also said it is increasing the amount of long-term funding it is providing to banks under a special liquidity plan announced in April. Since then, the British government has made more than $176 billion available to banks. Darling said that amount will now be increased to at least $350 billion.
"This is not a time for conventional thinking or outdated dogma, but for the fresh and innovative intervention that gets to the heart of the problem," British Prime Minister Gordon Brown said.
Brown and Darling said the plan would ensure the flow of money between banks and their customers. They said it would "unjam" any potential freeze by lenders jittery about global markets and liquidity.
Separately, the European Central Bank, the Bank of England and the Swiss National Bank offered $90 billion in overnight money to the financial sector, the Associated Press reported. The ECB offered up $70 billion, while the BoE and the Swiss bank each offered $10 billion.
Stock markets pummeled
Meanwhile, markets around the world took a beating. In Europe, Germany's Dax was down 5.4% and the Paris Cac fell 4.9%.
The Nikkei in Japan declined 9.4% - the third largest single-day decline ever - to a new five-year low, the Kyodo news agency reported.
"Investors are now afraid that the world is going to enter a depression," said Jesper Koll with Tantallon Capital Research in Tokyo.
"Japan is a leading indicator for the world economy and prospects for the world economy are not for a soft landing," Koll said. "They are for a recession, if not a depression."
And Hong Kong's Hang Seng index plunged 8.2%, even as the Hong Kong Monetary Authority announced it would lower interest rates a full percentage point starting Thursday.
Moscow's Micex stock exchange, where most of Russia's trading takes place, announced it was shutting down until Friday after falling more than 14% in the first half-hour of trading, the Associated Press reported. The RTS exchange, the benchmark of Russia's markets, fell more than 11% in the first 30 minutes and suspended trading for one hour.
One economist said the selloffs are necessary to clear the "dead wood" from the world markets.
"This is like a forest fire that ... is raging," said Tom Hougaard of City Index in London. "I think that this fire ... will rage for some time, but I also think we are much much nearer the end of it than we are near the beginning of it."
U.S. government scrambles
The global meltdown followed another unsettling day in the U.S. financial world. Stock investors took another drubbing on Tuesday, and a 500-point loss on the Dow Jones industrial average bringing two-day losses to nearly 900 points.
Earlier on Tuesday, the Federal Reserve announced an extraordinary plan aimed at unfreezing credit markets by backing short-term business lending.
The new program comes as the Treasury Department scrambles to put in place a $700 billion bailout of the financial system enacted on Friday. Under that program, the Treasury is expected to purchase troubled assets from banks and financial institutions in an effort to spur more lending.
Fed Chairman Ben Bernanke, in a dour economic outlook on Tuesday, hinted that the central bank may cut its short-term target interest rate.
Stock futures in U.S. markets were trading sharply lower Wednesday - pointing to another brutal day on Wall Street. A massive selloff gained momentum Tuesday following Bernanke's comments, bringing the Dow industrial's two-day slump to nearly 900 points.
Global financial crisis worsens - Oct. 8, 2008
