Russia backing Iceland as world crisis spreads

REYKJAVIK/LONDON (Reuters) - Russia negotiated an emergency bailout for Iceland and unveiled an aid package for its own banks on Tuesday, while Japan called for greater coordination in tackling the global financial crisis.

The International Monetary Fund increased its estimate of global losses from the financial meltdown to $1.4 trillion and warned that the world's economic downturn was deepening.

"The financial planet is in total crisis," European Central Bank Governing Council member Guy Quaden said, capturing a mood of disarray in governments and markets alike.

Around the globe, people are worried about safeguarding savings and keeping their jobs as some of the pillars of international finance give way.

Australia reacted to the crisis by cutting interest rates by 100 basis points to 6.0 percent, putting pressure on Western central banks to lower the cost of borrowing.

Japanese Prime Minister Taro Aso said he hoped the Group of Seven rich nations would send a firm message on stabilizing financial markets when it meets later this week in Washington.

"The impact would be substantial if the G7 didn't send a clear message. European leaders have met, but it didn't go well, and European financial markets have fluctuated rapidly and substantially, so I'm worried about the impact on Japan," Aso told reporters.

Leaders of Europe's G7 countries met in Paris last Saturday. European Union finance ministers said on Tuesday they would take all necessary measures to protect the banking system and savers.

The upheaval that began on Wall Street has effectively shut down interbank and other loan markets. Stemming from the collapse in the U.S. housing market and increase in bad loans, the crisis is the worst financial storm in 80 years.

ICELAND ACTS

Home to 300,000 people in the North Atlantic, Iceland has said it faces the threat of national bankruptcy after a rapid expansion in international financial services in recent years.

Using emergency powers adopted on Monday, Iceland dismissed the board of Landsbanki, putting its second largest bank into receivership.

Iceland also propped up its battered currency and said it planned to send a delegation to Russia to agree a 4 billion euro ($5.44 billion) loan to help it through the storm.

Russian President Dmitry Medvedev announced an extra 950 billion roubles ($36.4 billion) of new credit for banks at an emergency Kremlin meeting after Russian stocks suffered their worst pounding ever the previous day.

Medvedev said that most of the money, which is offered over five years, would be channeled through the biggest two state- controlled banks, Sberbank and VTB.

Britain will hold more talks with banks this week over a possible multi-billion pound injection of public funds, industry sources said as the credit crisis tightened its grip on Europe's main financial center.

News that banks and finance minister Alistair Darling held talks on Monday evening sent shares in Royal Bank of Scotland, Lloyds TSB and Barclays sharply lower on Tuesday as investors feared their holdings might be diluted in value by a big government stake.

A British government source denied an earlier report that the government would hold a telephone conference call with banking chief executives on Tuesday evening.

RATE CUTS?

Stocks opened higher on Tuesday after the Federal Reserve moved to unclog the commercial paper market used by many U.S. businesses to fund operations on a short-term basis. But shares slipped later into negative territory.

European shares held over one percent higher after big falls on both sides of the Atlantic on Monday.

Economists said the Australian rate cut might be followed in Europe and the United States.

Economists at Citi said there seemed to be "a growing chance" of emergency rate cuts from the Bank of England and the European Central Bank in the next few days, especially if the Federal Reserve was ready to move.

Bill Gross, one of the most influential U.S. investors as head of the world's largest bond fund and chief investment office of Pimco, called for the Fed to cut interest rates to 1 percent from 2 percent.

"We are experiencing asset deflation and the threat of headline inflation is long past," he said in a note.

Japan's central bank, with far less room to maneuver, voted to keep rates unchanged and played down speculation it would join other central banks in cutting rates.

EU GUARANTEE

European Union finance ministers agreed to guarantee bank deposits up to 50,000 euros, against 20,000 euros under current rules, a document viewed by Reuters said.

Ministers agreed that the ceiling should be "raised to 50,000 acknowledging that many are determined to raise the minimum to 100,000 euros," the document said.

A number of EU countries have broken ranks by offering various forms of blanket guarantees to savers, prompting criticism that the bloc was divided.

(Reporting by Reuters bureaus worldwide; Editing by Ralph Boulton)