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Iceland raises rates sharply, others poised to cut

Iceland raised interest rates by 6 percentage points to 18 per cent on Tuesday, taking the opposite tack to most countries fighting a global financial crisis which the Bank of England said could cost $2.8-trillion (U.S.).

The United States is expected on Wednesday to cut interest rates, with Europe and Britain forecast to follow next week, to try to head off the prospect of a deep recession.

Other countries continued to bolster their banking sectors, hit by holding assets linked to bad mortgage debts in the United States, and shore up tumbling stock markets.

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Japan restricted investor bets on falling share prices to try to end a stock market slide, and delayed a parliamentary election to concentrate on protecting the world's second biggest economy from recession.

Japan's Nikkei climbed 6.4 per cent after hitting lows not seen in 26 years. That helped European shares gain 4.3 per cent and U.S. stock futures were up around 4.0 per cent, pointing to a higher start on Wall Street.

In Iceland, where the once-booming economy has been driven close to bankruptcy by bank failures, the central bank said the steep rate increase was part of a deal struck with the International Monetary Fund for a $2-billion loan.

The finance minister said the increase was also to stabilize the Icelandic crown, which has crumbled and effectively stopped trading on Oct. 22.

"This is a part of our plan to stabilize the currency market. If we are successful, which I am confident in, this will only be for a short time that we need to act on the foreign currency rate with high interest rates," Arne Mathiesen said.

The move was a "desperate attempt to restore a degree of confidence in the local market," said Elisabeth Gruie, emerging markets strategist at BNP Paribas in London.

Prime Minister Geir Haarde said he was optimistic about getting $4-billion from other Nordic states, which Iceland believes it needs on top of the IMF money.

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Governments have agreed to inject around $4-trillion into banks and markets to ease the worst financial crisis in 80 years.

The Bank of England said the work so far should calm the banking system but was cautious about the wider economy. It projected losses globally at $2.8-trillion.

"The instability of the global financial system in recent weeks has been the most severe in living memory," said Deputy Governor John Gieve. "And with a global economic downturn under way, the financial system remains under strain."

Britain, the United States and European Central Bank are expected to cut rates to spur growth.

The consensus among Fed watchers is for a half-point cut in rates to 1 per cent, the lowest level since June 2004. It has already cut the benchmark federal funds rate to 1.5 per cent from 5.25 per cent over the past 13 months.

It will announce its decision on Wednesday. The ECB and Bank of England are expected to cut rates on Thursday next week. The moves would follow a co-ordinated round of monetary easing from major central banks earlier this month.

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Iceland is one of several countries to tap international lenders for loans.

Ukraine's parliament postponed a debate on legislation to underpin an IMF bailout after a fresh row over an early election forced an adjournment, despite the urgings of its prime minister and the head of the lender for quick action.

The Fund is due to finalize a deal this week with Hungary, and Germany said it would help Pakistan, which has just a few weeks to raise billions of dollars in foreign loans needed to meet debt payments and pay for imports, in its negotiations.

The EU commission said member states were agreed in principle on granting aid to Hungary, where the economy is heavily exposed to foreign financing at a time when investors are pulling back from developing economies.

"The Commission stands ready to help and we are preparing to grant financial assistance to Hungary," Commission spokeswoman Amelia Torres told a daily news briefing.

Further afield, a senior official at South Korea's central bank said he expected a "broad second shock" in financial markets, especially in emerging economies.

He said South Korea and Brazil had faced the first wave.

South Korean banks turned to the U.S. Federal Reserve for dollars for the first time to help resolve a dollar funding crisis.

Faced with a funding squeeze and a sharp economic downturn, major companies joined banks in the queue for government aid.

U.S. automakers General Motors and Chrysler sought government cash for a merger, Russia was in talks with China for export-backed loans for its companies, Kazakhstan pumped $5-billion into its banks and Mongolia was preparing a $500-million to $600-million bailout for its banking sector.

Three of Japan's largest banks, which largely escaped the fallout from U.S. mortgage defaults, are nonetheless looking to replenish capital lost on the tumbling stock market.

Tokyo banned naked short selling, bringing the move forward by one week. Naked short selling allows traders to effectively sell stocks they do not own and without borrowing them first in the hope they will profit by buying stocks back at a lower price.

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