World Markets Face Financial Melt-down

Although global stock markets had this morning reversed a dangerous slide into what was potentially a second worldwide crisis, European shares have since fallen further as investors continued to worry about the outlook for the global economy.

After opening higher, the main indexes in the UK, France and Germany all fell this afternoon by between 2% and 3.5% - despite reassurances from the G20 nations that it was ready to take action to stabilise markets.

Earlier, things looked more positive as the developed nations of the G20 group pledged to step in and stop the European debt crisis spiralling out of control.

There were sighs of relief all round as European shares stabilised initially this morning following sharp falls on Thursday.

The main indexes in the UK, France and Germany were all up between 0.5% and 1% in early trading, after falling by about 5% in the previous session.

After yesterday's global rout, there was a major effort to back the banks and to stymie any further financial woes as the stock markets lost confidence - but that seems now to have been reversed.

UK Prime Minister, David Cameron - who is in Canada - yesterday joined in the efforts to halt the slide and signed a joint letter responding to President Sarkozy's statement in New York on Wednesday that it should be a G20 priority to "help the world find the path to growth".

The letter signed, by Australian, Canadian, Indonesian, Mexican and South Korean leaders raises pressing issues, which they said needed to be addressed at the next G20 summit to restore global economic confidence.

The top developed countries have been under pressure from investors to show action, with both finance ministers and central bankers from the 20 economies saying they would take all steps needed to calm the stresses wracking the global financial system.

"We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required," the G20 said in a communiqué after a dinner meeting.

The move came after share prices in several European banks tumbled and their funding costs rose as investors worried about their exposure to debt issued by Greece and other debt-heavy European countries.

World stocks fell on Thursday to their lowest level in 13 months, hurt by the risk of a new US recession and weaker economic data from China as well as Europe's debt problems.

However in a sign the euro zone would add to the potency of its €440bn (£386bn) financial rescue fund, the G20 statement said the bloc's members would implement "actions to increase the flexibility of the EFSF and to maximize its impact" by the group's next ministerial meeting in October.

Yesterday, in the letter, the leaders argued that in order to restore global economic confidence, a number of issues must be addressed at the next G20 leaders' Summit at Cannes in November.

The letter highlights that President Sarkozy is right to call for the Cannes Summit focus to be to help the world to growth and that decisive action is needed to support growth, confidence, and credibility.

It said the leaders need to address the challenges of stagnating economies, declining global growth, and a loss in confidence in their ability and that the barriers to progress are now political as much as economic, and the forthcoming Cannes Summit is the place to do this.

It added that the various leaders must act individually in each country to address collective needs and that the Eurozone must confront its debt overhang, deal with excessive deficits, strengthen the banking system, and improve competitiveness.

Meanwhile, the correspondence also added that countries with long-term debt problems must put in place and implement credible, growth-friendly medium-term fiscal consolidation plans and that the completion of a trade deal would provide a strong economic stimulus.

Mr Cameron said: "I think what needs to happen is every country has got to face up to its own problems and difficulties and deal with them, whether that is debts in the Eurozone, whether it is problems in banks, whether it's dealing with our deficits - every country has to do that.

"And that's why I've come together with leaders of countries in the G20 but as diverse as Mexico, Canada, Australia, South Korea and signed a letter to President Sarkozy, who's leading the G20 this year, to make exactly that point - face up to the debts, to face up to the deficits, face up to the problems.

"Every country in the world has got to do that in a coordinated way so we can get growth moving," he concluded, on Thursday.

The Prime Minister also said yesterday that any failure by the leaders in the US and Europe to tackle government deficits "threatened the stability of the world economy".

Mr Cameron spoke on Thursday as stock markets around the world fell sharply again, with the FTSE100 suffering its biggest drop for more than two years.

The Prime Minister spoke in Canada after delivering a blunt warning to President Barack Obama and eurozone leaders about the need to follow Britain's example and curb their deficits.

In a speech in Ottawa, Mr Cameron backed the contents of the letter and said that Western politicians must show more "leadership" and warned that political indecision would only worsen the crisis.

(BMcC/GK)