EU Keeps Lid on Spending, US Helps Auto Part Makers

The European Union resisted pressure to pump more cash into its recession-hit economies just as Washington added another $5 billion to its skyrocketing rescue bill, throwing a lifeline to stricken auto parts makers.

EU leaders are expected, however, to agree on Friday to contribute at least $75 billion to the International Monetary Fund to boost its firepower in the face of the worst global downturn in decades.

The IMF warned the world economy could shrink as much as 1 percent this year, in its first contraction since World War Two. It also said international coordination and quick steps to purge banks' balance sheets of "toxic assets" were needed to produce a gradual recovery next year.

The EU leaders also backed the a proposal to double to 50 billion euros (US$67.5 billion) an EU crisis fund for eastern European nations not sheltered by being part of the single euro currency zone.

But they defended the stimulus packages they have already launched, despite calls led by Washington for Europe to spend more and after the Federal Reserve's dramatic decision on Wednesday to pump further $1 trillion into the limping economy.

"A competition to outdo each other with promises will not calm the situation," German Chancellor Angela Merkel told German parliament before the 27-nation bloc's summit.

On Thursday, the U.S. government promised $5 billion to auto parts suppliers crucial to the survival of U.S. car makers, in the latest effort to buttress the economy now in its 15th month of recession.
     
Reckless Speculation

President Barack Obama has pushed through a $787 billion stimulus package and his administration has given$17.4 billion to its struggling car makers to prevent their collapse and save thousands of jobs, with jobless numbers already at record highs.

But public rage over $165 million in bonuses paid by insurer American International Group  after it was saved by a $180 billion bailout, continues to haunt Washington's $700 billion financial industry rescue, seen as crucial for economic recovery.

To contain the outrage over what Obama described as a symptom of "a bubble and bust economy that valued reckless speculation over responsibility and hard work", the House of Representatives slapped a heavy tax on the AIG bonuses to recoup most of the payments.

A House panel is also set to consider legislation that will prohibit bonus payments by bailed-out companies until they fully repay public funds.

The aggressive move by the Fed to pump more liquidity into the system, which initially buoyed global financial markets by inspiring optimism about the chances of U.S. and world economic recovery, got mixed reviews once investors had more time to digest the possible implications.

The dollar was hardest hit, heading for its worst week in 24 years due to fears that by printing more money the Fed will create a glut of the world's main reserve currency and lead to resurgence of inflation in the future.

"This is a historic moment, the start of the debasement of the world's reserve currency, and it feels to many participants that in the grand sweep of history  we are witnessing the end of 'Rome' on the Potomac," said Alan Ruskin, a RBS strategist.

Stock market sentiment also soured after an initial rally, reflecting worries that the Fed ventured into uncharted waters with its decision to buy $300 billion of U.S. Treasuries, with little certainty whether the gambit would pay off.

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With Tokyo closed for a holiday, Asia-Pacific stocks edged lower after the U.S. S&P 500 index slipped slipped 1.3 percent overnight.

Banks, which led the recent rally on signs that business was improving, have been busy shoring up their capital depleted by after the worst year for the sector in living memory.

HSBC Holdings won approval for its record 12.9 billion pound ($18.7 billion) rights issue while Citigroup began an offer to swap billions of dollar of preferred shares into common stock. 

UBS said it would buy back up to 1 billion euros of bonds, which are now trading at a discount. The Swiss bank also said it will seek shareholder approval to raise an extra 10 percent of equity capital if needed.
     
Seeking Unity

As leaders of the world's top economies gear up for the Group of 20 meeting in London on April 2 on the global economic action plan, the EU wants to present a united front there.

But some EU governments are under pressure to do more from growing signs of social unrest. French President Nicolas Sarkozy attended the summit on a day of mass protests over his handling of a crisis which could push Europe's unemployment rate towards 10 percent this year.

• Slideshow: Origins of the Financial Crisis

But the EU leaders said taxpayer money was not a cure all to the crisis triggered by excessive risk-taking by some of the world's top financial institutions. Many favor tightening regulation rather than running up huge deficits that could put strains on the euro single currency, whose bedrock has been years of fiscal austerity.

"You can't think you can solve everything with taxpayers' money. Stimulus packages are already in place and taking us through this challenging time. We already have done a lot," said Swedish Prime Minister Fredrik Reinfeldt.

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