US warns of further bank failures

The US treasury secretary has warned some banks will still fail despite the $700bn government rescue package to shore up the financial system.

Henry Paulson called for the plan's swift implementation, but said the financial crisis would not end soon.

Seven central banks on Wednesday cut interest rates in an effort to steady the faltering global economy.

Although the moves did not fully quell investor fears, Thursday saw a calmer climate on Asia's main stock indexes.

By 0430 GMT, Japan's benchmark Nikkei index was up by 2% after the Bank of Japan injected two trillion yen ($20.1bn) into the money markets in an effort to calm fears.

Tokyo had suffered its biggest one-day drop in 21 years on Wednesday, with the Nikkei shedding nearly 10% of its value.

In Sydney, Australia's financial market lost 1.2%, but Hong Kong's Hang Seng index rallied 2.8%.

South Korea's stock market also posted 2.5% gains after the central bank announced a 0.25% interest rate cut.

Taiwan's Central Bank cut its 10-day loan rate to 3.25% from 3.5%.

Global action

In his bleak assessment, Mr Paulson warned the ongoing financial chaos had "seriously impacted" the economy.

"Even with the new treasury authorities, some financial institutions will fail," he added.

There was an equally stark warning from the International Monetary fund, which said global financial markets were facing their most dangerous shock since the 1930s.

In an unprecedented co-ordinated move on Wednesday, rates were cut by the Bank of England (to 4.5%), the US Federal Reserve (to 1.5%), and the European Central Bank (ECB) (to 3.75%), with similar cuts from the central banks of Canada, Sweden and Switzerland.

Although it did not cut its own rate - which is just 0.5% - the Bank of Japan expressed its "strong support" of the policy. In a separate move, China cut its own interest rate by 0.27%.

While European and US markets initially reacted well to the news, they later lost ground as investors were unconvinced the rate cuts were enough to solve the financial crisis.

In New York, the main Dow Jones stock index lost ground for its sixth consecutive session, ending 2% down.

The heads of the IMF and the World Bank are due to discuss the world's ongoing financial turmoil in Washington later, and finance ministers from the G7 group of industrialised nations are meeting later this week.

More work to do

The IMF's chief economist, Oliveri Blanchard, said the orchestrated rate-cuts could not solve the world's financial crisis on their own but "were clearly a step in the right direction".

But he warned "there will be tough economic times ahead".

Chief international economist at Capital Economics, Julian Jessop, said the rate cut would provide a "temporary boost to confidence", but warned there was still a lot more work to do.

"The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become," said Mr Jessop.

On Wednesday, the UK government unveiled a package of measures aimed at rescuing the banking system which could add up to £400bn ($692bn).

Italy also unveiled details of a banking rescue plan that could involve the government taking stakes in failing banks.

The US Federal Reserve, meanwhile, agreed to provide insurance giant American International Group with a $37.8bn loan on top of the $85bn loan given to the troubled firm last month.