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Posted by Kris | Tuesday, November 25, 2008 | | 0 comments »

U.S. launches support plan
Tuesday November 25, 9:15 am ET

By Mike Peacock

LONDON (Reuters) - The United States and Europe prepared fresh measures on Tuesday to tackle a sharp economic downturn, which top miner BHP Billiton cited in abandoning a $66 billion bid for Rio Tinto.

The U.S. economy contracted by 0.5 percent in the third quarter, revised data showed, and authorities announced an $800 billion life-support scheme for the U.S. financial system.

A further deterioration is expected this quarter, putting the world's largest economy into recession stretching into 2009.

Wary of the effects of the worst financial crisis in 80 years, BHP Billiton called off its hostile bid for rival Rio, catching markets off their guard.

"We have concerns about the continued deterioration of near-term global economic conditions, the lack of any certainty as to the time it will take for conditions to improve and the risks that these issues imply for shareholder value," BHP Chairman Don Argus said in a statement.

U.S. consumers cut spending at the steepest rate in 28 years, according to a Commerce Department report underlining how rapidly activity was slowing.

China, the world's biggest consumer of many metals, this month unveiled a 4 trillion yuan ($586 billion) spending package to prop up its economy, but growth would still likely slow to around 7.5 percent in 2009, the World Bank said.

That would be China's slowest growth rate since 1990.

Official data confirmed Germany is in recession for the first time in five years.

And falling consumer and business morale in Italy and France pointed to a continent heading for a prolonged recession, with a surprise tick up in consumer sentiment in Germany seen as an isolated and temporary blip.


After Britain announced on Monday a 20 billion pounds fiscal boost, including a 2.5 points cut in value-added tax, the United States and European Union put their shoulders to the wheel.

The U.S. Federal Reserve announced a $600 billion program to buy mortgage-related debt and securities and a $200 billion facility to back consumer loans, including student, auto, and credit card loans.

"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved financial conditions more generally," a Fed statement said.

What started more than a year ago as a meltdown in the U.S. market for high-risk mortgages has engulfed the world, freezing access to credit, sparking bank collapses and requiring the financial bailout of entire countries.

U.S. stock futures shot higher in response to the plan. European shares reversed earlier losses.

The European Commission will propose on Wednesday measures to stimulate the recession-hit European economy including VAT cuts and a call for lower European Central Bank rates.

The draft proposal, obtained by Reuters, did not specify the size of the stimulus plan, which Germany said last week could be worth some 1 percent of European Union gross domestic product.

The French government will launch its own "quite massive" stimulus in the next 10 days, President Nicolas Sarkozy said.

"In less than 10 days we will announce a revival plan to save the car industry ... and strengthen the building sector," Sarkozy said during round table discussions in northern France.

A more reticent Chancellor Angela Merkel said the German government would decide in January whether additional measures to support growth were needed.

RECESSION A REALITY - HUH?? Everyone knows that!!

Paris-based think-tank the Organization for Economic Cooperation and Development projected the U.S. economy would shrink 0.9 percent next year.

It revised its forecast for the euro zone, saying it would contract 0.6 percent, more than the 0.5 it had predicted.

"The recession which we are heading into now may turn out to be even deeper and even the world economy at large may go into recession," OECD chief economist Klaus Schmidt-Hebbel said.

Bank of England Governor Mervyn King said Britain's fiscal package would mitigate its recession but not solve it.

"The most pressing is to ensure that normal bank lending is resumed," he told a parliamentary committee. "Without that, the downturn in activity could become protracted and extremely damaging."

Following huge losses tied to the U.S. housing market collapse, banks continue to hoard cash rather than lend it to each other, to businesses and individuals.

Corporate gloom was widespread, eclipsing relief at the rescue of number two U.S. bank Citigroup.

AXA, Europe's second-biggest insurer based on premium income, cut its 2008 profit forecast and said its 2012 financial goals were increasingly "obsolete.

The world's largest steelmaker ArcelorMittal is poised to cut 16 percent of its U.S. workforce, beginning in January, the Wall Street Journal said.

Australia's Qantas airline cut its 2009 profit forecast and Honda, the world's top motorcycle maker, said sales could stop growing in 2009.