By Walter Brandimarte
WASHINGTON (Reuters) - Chaotic financial markets may react positively this week to a long-sought coordinated response by world leaders to a financial tsunami threatening to wipe out the global banking sector.
The global financial system was on the brink of meltdown on Saturday after finance chiefs from the Group of Seven rich nations failed to agree on concrete, joint measures to end the crisis.
But European leaders rushed to Paris on Sunday to come up with a tangible plan to unfreeze capital markets and restore confidence.
Their plan included state guarantees for new medium-term bank debt and state injections of capital into banks, adding to help from the European Central Bank to unfreeze commercial paper markets.
"They're stepping up to the plate with all their fire power. It is literally a financial, economic call to arms," said Peter Kenny, managing director at Knight Equity Markets in Jersey City.
"It is not going to be overnight but it is going to help a lot. It is going to take the edge of panic off market psychology," he added.
U.S. stock futures opened higher on Sunday, suggesting Wall Street may rebound on Monday after eight straight sessions of losses on the benchmark S&P 500 index <.SPX>.
But volatility is unlikely to go away any time soon, analysts and bankers warned, because confidence cannot be restored overnight.
"It is impossible to talk about how long it takes" to stabilize markets," Deutsche Bank CEO Josef Ackermann said on Sunday in Washington.
"The loss of confidence has been so substantial that it will not happen overnight. But that is why some guarantees, some capital from governments in certain banks is necessary in order to speed up this restoring of confidence," he added.
Also contributing to the volatility this week will be key third-quarter corporate earnings results from major banks and companies. The numbers will reveal the scale of damage suffered by the real economy from market turbulence which erupted in August 2007.
JP Morgan
Results from Intel
PANIC AND FEAR
World stocks, measured by the MSCI index, lost a fifth of their value last week, tumbling to a five-year low as investors grew concerned that major economies will sink into recession, wiping out corporate profits and damaging consumption.
Barclays Capital estimates the trailing price-to-earnings ratio of world stocks fell to just under 9 percent from 18 only a year ago and investors are discounting a 45 percent decline in profits.
In Britain, where stocks have fallen 39 percent this year, Barclays says the dividend yield is just over 6 percent, a level that has only been seen three times in the past 108 years.
Compared to long-dated gilt yields, dividend yields have not been this high since the Battle of Britain in 1940.
EMERGING PINCH
Emerging markets are also feeling the pinch as foreign capital drains away from risky assets, sending their shares down 20 percent last week <.MSCIEF>, on top of a 10 percent decline suffered the week before.
Since January, emerging country stocks have lost more than 50 percent.
Investors are demanding emerging sovereign debt to give yields of more than 600 basis points above U.S. Treasuries -- the highest since mid-2004 -- in compensation for holding riskier bonds.
In Iceland, where the government took control of three of the country's biggest banks last week, financial markets are grinding to a halt as traders report hardly any trades in the crown currency and money markets.
The country signaled on Sunday, however, that it was more ready to turn to the International Monetary Fund for assistance.
The cost of insuring the sovereign debt of Ukraine, Kazakhstan and other Eastern European countries has soared, pricing in a mounting risk of default. Many emerging market currencies are hitting multi-year lows.
(Additional reporting by Natsuko Waki in London; Editing by Andrea Ricci)
