Markets could fall another 20%: IMF

US finalises plan to acquire direct stakes in American banks

THE International Monetary Fund yesterday warned markets could drop another 20 per cent in a worst-case scenario as the US government pushed on to finalise a plan to buy direct stakes in American banks.

Global stocks plunged to five-year lows on Friday as panic gripped. The US S&P index and European stocks suffered their worst week ever, losing around a fifth of their value.

"In a worst-case scenario, governments will need a few more weeks to take the correct measures and the markets could fall another 20 per cent. Then, we'll turn around," the IMF's chief economist Olivier Blanchard was quoted as saying in Italian daily Corriere della Sera.

The world's rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money, but they offered no collective course of action to avert a deep global recession.

In a statement, the Group of Seven stopped short of backing a British plan to guarantee lending between banks, something many on Wall Street saw as vital to end growing market panic.

However, an emergency meeting of eurozone leaders today would discuss a bank rescue package taking Britain's initiative as a reference point, a source close to the French presidency said, even though as a non-euro member Britain would not attend.

Reports say Germany is thinking along the same lines.

Britain's rescue plan, launched last week, involved injecting £50 billion (US$86 billion) of taxpayers' money into its banks and, crucially, to underwrite interbank lending which has all but frozen around the globe.

Treasury Secretary Henry Paulson said the US government would buy shares of financial institutions if necessary to halt market turmoil that has wiped out trillions of dollars of wealth and threatens to throw the global economy into major recession.

"We're going to do it as we can do it in a proper way that will be effective. Trust me, we're not wasting time, we're working around the clock," Paulson said late on Friday after the G7 meeting broke up.

He declined to discuss the size of the US bank equity purchases, but said details were being developed quickly.

Analysts said the G7 statement was unlikely to allay the panic that has swept through markets in recent weeks.

"Right now, everybody's scared, they're panicking," said Mark Waggoner, president of Excel Futures Inc in California.

"No matter what they (G7) do it's not going to be an instantaneous fix and everybody wants a fix that's immediate."

The IMF's Blanchard estimated there was about a 50 per cent chance of a recession in the US and Europe.

Leaders of eurozone countries will meet in Paris today.

EU chiefs are due to hold a regular summit in Brussels on Oct 15, but the ferocity of this week's turbulence persuaded French President Nicolas Sarkozy to summon the 15 states that have adopted the euro for emergency talks.

"There are two competing models. The American model, which no one wishes to draw inspiration from, and the British model. This is what everyone is talking about," the source close to the French presidency said.