China slashes rates as EU unveils more stimulus

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By Jeremy Gaunt

LONDON (Reuters) - Massive stimulus plans to drive the world out of recession took center stage on Wednesday with the European Union asked to provide a 200 billion euro boost and China announcing its biggest interest rate cut in 11 years.

The moves came on the heels of an $800 billion credit market bailout from the U.S. Federal Reserve.

Underscoring the severity of the downturn, U.S. consumer spending plunged at the steepest rate in more than seven years and Toyota Motor Corp had its top-notch credit rating cut for the first time in a decade.

U.S. President-elect Barack Obama, meanwhile, was expected to name former Fed chairman Paul Volcker to head a special advisory panel on the financial market and economic crisis.

China's cut in banks' benchmark lending and deposit rates by 108 basis points came a day after the World Bank said Chinese growth next year would be around 7.5 percent, the slowest rate since 1990.

The People's Bank of China (PBOC) also reduced reserve requirements by 1 percentage point for big banks and by 2 percentage points for smaller banks.

"It's certainly a lot more aggressive than anything they've done recently. I think it speaks volumes about just how much China has slowed down," said Anthony Muh of AT Asset Management in Hong Kong.

The European Commission approved a package it hopes will be taken up by EU member states aimed at giving the sagging European economy a sharp, temporary boost with a 200 billion euro ($260 billion) spending plan across the 27-nation bloc, an EU source said.

The plan, higher than initially thought, calls for a targeted and temporary fiscal stimulus of 1.5 percent of EU gross domestic product. National measures would account for around 170 billion euros, or 1.2 percent of GDP, and EU and European Investment Bank budgets around 30 billion euros.

The Commission wants the EU's 27 countries to unite on a two-year dash for growth, even if it means breaking the region's national deficit targets.

Some EU countries were cautious. German Chancellor Angela Merkel warned EU partners against competing to produce big stimulus packages for their economies and defended her plans for Germany as policies of "measure, middle ground and reason."

Germany and Britain have already launched stimulus programs, and France is poised to. Berlin said it assumed its existing plan would be enough.

FISCAL WORRIES

Stock markets slipped over worries about the impact of huge stimulus programs on national accounts. Japan's Nikkei average shed 1.3 percent and the index of top European shares was down 2.3 percent.

Wall Street looked set for a poor start after three positive days in a row.

In Cairo, European Central Bank President Jean-Claude Trichet said the bank could cut interest rates next week as long as there was evidence that inflation pressures have eased.

There is -- German inflation likely slowed for a fourth month running in November as fuel costs fell, pointing to easing price pressures in the broader euro zone, state data showed.

Trichet's comments were the latest in a series of comments from central bankers that have led to widespread expectations of earlier monetary policy ahead.

The stimulus moves in Europe and China followed Tuesday's announcement by the U.S. Federal Reserve of an $800 billion plan to buy mortgage-related debt and back consumer loans.

Under the life-support intervention, the Fed is putting $600 billion toward mortgage-related debt and securities and $200 billion to support consumers.

US BUYING STRIKE

Data on Wednesday showed U.S. consumers cut spending during October at the steepest rate in more than seven years. Spending plunged 1 percent, slightly more than the 0.9 percent decline that Wall Street economists had forecast.

Authorities across the world are struggling to keep their economies from sliding deep into recession and have already pumped billions into banks, money markets and now their broader economies as well as slashing interest rates.

The Organization for Economic Cooperation and Development forecast on Tuesday that growth among its 30 member nations would contract by 0.4 percent next year, with "negative growth" in 19 countries.

Elsewhere, Indonesia approached Australia, the World Bank and other creditors to help cover its budget deficit next year, an Indonesian finance ministry official said.

Evidence of the sharp global downturn's impact on business came when Fitch Ratings downgraded Toyota's long-term foreign and local debt ratings to AA from AAA, with a negative outlook.

"The negative developments in the industry are so substantial and fundamental that even the strongest player -- Toyota -- can no longer support an 'AAA' rating," said Fitch Director Tatsuya Mizuno.

(Additional reporting by Reuters bureaux worldwide, editing by Mike Peacock)

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