Finance & Business World

Latvia’s International Monetary Fund- led bailout package will involve loans from other European governments and will maintain the country’s currency peg to the euro, the IMF said.

The program “maintains Latvia’s current exchange rate parity and band,” said Christoph Rosenberg, IMF mission chief for the Baltic nation, in an e-mailed statement yesterday. Latvian Finance Minister Atis Slakteris on Dec. 4 told lawmakers that some IMF officials were seeking a devaluation of the lats.

Latvia, which joins Hungary, Ukraine, Serbia and Belarus among eastern European states asking for IMF financial help, may need as much as 5 billion euros ($6.3 billion), Fitch Ratings predicts. The economy may shrink 5 percent next year and, without spending cuts, the budget deficit may swell to 10 percent of gross domestic product, Slakteris said in the parliament.

The IMF is working with the European Commission, some European governments and regional and multilateral institutions, Rosenberg said in the statement.

The rescue plan “will require agreement on exceptionally strong domestic adjustment policies and sizeable external financing, as well as broad political consensus in Latvia,” Rosenberg said. “All participants are working to bring these program discussions to a rapid conclusion.”

The country has run a fixed exchange rate since the lats was reintroduced in 1993, first pegging it to a basket of currencies, and then to the euro at the beginning of 2005. Latvia has a quasi- currency board system, where the lats is backed by foreign currency and allowed to rise and fall against a midpoint per euro.

‘Good News’

Slakteris had warned that some IMF experts sought a currency devaluation as a way to help the economy recover quick pay day loans.

It’s “good news” that the IMF does not favor a devaluation, said Lars Christensen, chief economist at Danske Bank A/S, by phone. “This will bring some comfort to the markets.”

The central bank said on Dec. 5 that its reserves fell about 30 percent in two months to $4.2 billion at the end of November as it defended the peg to the euro and the government took out money it kept in deposit. The bank bought 660.5 million lati ($1.2 billion) in the past nine weeks after the currency weakened to the limit of its band.

The government said on Dec. 3, it was increasing its stake in Parex Banka AS, the country’s second-biggest lender, to 85 percent from 51 percent as withdrawals mounted. The lender lost about 500 million lati in deposits since September and the government and banking regulator have imposed restrictions on withdrawals.

The economy of the former Soviet state that joined the European Union in 2004 contracted an annual 4.2 percent in the third quarter, the steepest drop since at least 1994. That compared with growth of 0.1 percent in the second quarter.

Industrial output fell for a sixth month in October, led by a decline in the production of furniture, paper and wood as the recession took hold. The unemployment rate rose to 6.1 percent in November, the highest level in 20 months.

Prime Minister Ivars Godmanis has said he will resign if lawmakers fail to approve his macroeconomic program, his spokesman Edgars Vaikulis said by telephone on Dec. 4.

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Treasury’s $700 billion bailout has gotten most of the nation’s attention, but some of the government’s lesser-known programs are doing their part to help ease credit as well.

Two new government programs aimed at easing short-term liquidity concerns for financial institutions have started to take hold. The first, the Federal Reserve’s Commercial Paper Funding Facility, allows companies to sell highly rated 3-month debt to the government in exchange for ultra-low interest rates.

A Fed report released Thursday showed that the key market for business lending has expanded for the sixth straight week.

The amount of so-called commercial paper that was sold in the seven days ended Dec. 3 rose by $11.6 billion, or 1%, to a seasonally adjusted $1.7 trillion, the report said.

Commercial paper is short-term debt that big businesses and financial institutions issue to fund day-to-day business operations. Long considered a safe and liquid investment, the debt is bought chiefly by conservative investors such as money-market funds.

But when the credit crisis hit in mid-September, funds began to invest in even safer assets, leaving many businesses in dire need of short-term financing.

"Investment committees for money market funds were worried that they might be investing in the next Lehman," said Bill Larkin, portfolio manager at Cabot Money Management. "They got out of the commercial paper market, and now they’re buying mostly government bonds."

As a result, on Oct. 20, the Fed began buying up commercial paper to help businesses meet their funding needs.

A separate Fed report showed that the government bought nearly $10 billion of commercial paper over the past week. It was the second week in a row in which the overall market expanded faster than the Fed’s weekly purchase rate, suggesting the program has begun to attract private borrowers.

"The program has helped, but the commercial paper market may never come back to the way it was," Larkin said. "That’s where the FDIC’s new program can fill the void."

That second program, the Temporary Liquidity Guarantee Program, allows the FDIC to guarantee the payment of newly issued unsecured bank debt with greater than a one-month maturity, in exchange for a nominal fee payday loans online.

The FDIC will guarantee a bank’s issuance of debt, usually in the form of corporate bonds, for up to 125% of a bank’s total debt outstanding as of Sept. 30 that was scheduled to mature on or before June 30, 2009.

In just its second week, the FDIC’s guarantee program has attracted numerous participants, including Citigroup (C, Fortune 500), General Electric (GE, Fortune 500)’s finance division GE Capital, JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and Goldman Sachs (GS, Fortune 500), which only two months ago applied for "bank holding company" status so it could receive government aid for banks.

Bank of America has issued $9 billion in bonds under the program. Citi issued $5.5 billion, and Goldman and JPMorgan issued $5 billion. Wells Fargo sold $6 billion. GE has not yet issued bonds, though it said it was approved for $139 billion of FDIC guarantees.

The program has thus far guaranteed more than $40 billion in bonds, and Larkin believes the program will eventually guarantee more than $200 billion.

Early indications show the plan is working. Corporate bond yields are down, making lending cheaper for businesses. And credit default swaps, insurance contracts on debt, are also much less expensive.

For instance, credit default swaps on Citigroup bonds were running at about 5% of the bond’s price just before the program started, and the insurance cost just 2.6% Thursday.

The guarantee program will remain critically important if companies remain unable to finance short-term debt through the commercial paper market after the Fed program expires. Larkin believes the FDIC program could help in the long run when the commercial paper market might not be able to.

"Risk-averse people are happy, because they’re really looking for places to put their money," said Larkin "The FDIC program is giving institutions access to these crucial markets again." 

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Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.

Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week, the source said.

The increased demand for mortgage-backed securities would prompt mortgage rates to drop. That, in turn, would enable homeowners to refinance into lower-cost loans and make it cheaper for potential homebuyers to get into the market.

Spokeswomen from Treasury and the Federal Housing Finance Agency, which oversees Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), declined to comment.

Last week’s Fed move drove mortgage rates down to 5.5%, from 6.06% a week earlier. The Fed said on Nov. 26 that it would purchase up to $500 billion in mortgage-backed securities from Fannie, Freddie and Ginnie Mae, and that it would buy another $100 billion in direct debt issued by those firms.

Mortgage applications more than doubled as a result, the Mortgage Bankers Association said Wednesday. Much of the activity stemmed from homeowners looking to refinance.

Industry groups have been pressuring President-elect Barack Obama and lawmakers to lend a helping hand to the housing market. The National Association of Realtors, for instance, has called for Treasury to buy mortgage-backed securities.

Meanwhile, a coalition of industry groups have banded together under the "Fix Housing First" banner to call for measures including tax credits of up to $22,000 and the creation of a 30-year mortgage, carrying rates as low as 2.99%.

Experts, however, had mixed views on how much a new Treasury initiative would help homeowners and the economy cash advance loan. Some felt lower rates would help stabilize the housing market by bringing in new buyers and would give those who refinance more money to spend.

"If it gets people buying homes and spending, it will help reverse the economy and get us out of this recession," said Scott Talbot, senior vice president of the Financial Services Roundtable, which is pushing the measure.

While it takes time to entice new buyers into the market, low rates accelerate that process, said Greg McBride, senior financial analyst at Bankrate.com.

"It is clearly designed to bring buyers into the marketplace and soak the inventory of unsold homes," he said.

But others questioned whether rates would remain low and, even if they did, only a narrow slice of credit-worthy borrowers would benefit.

Rates are already inching up, hitting 5.75% on Wednesday, said Keith Gumbinger, vice president of HSH Associates. Several government attempts to lower mortgage rates this year have failed to have a lasting effect.

Also, the proposal would do little to help troubled borrowers who have fallen behind on their payments, have no equity in their homes or have lost their jobs. With credit standards still high, these homeowners would not be able to refinance and take advantage of the lower rates, he said.

Finally, super-low rates could keep private investors out of the mortgage-backed securities market, forcing the government to remain the primary buyer of such investments, Gumbinger said. Rates have not fallen below 5.37% in more than 45 years.

"I can’t imagine there will be a significantly active marketplace of people who want to buy at these low rates," he said. 

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Australia has room to lower interest rates further and increase government spending to support the economy amid the current global crisis, former central bank Governor Ian Macfarlane said.

Reserve Bank of Australia Governor Glenn Stevens, Macfarlane’s successor, cut borrowing costs by 1 percentage point yesterday to a six-year low of 4.25 percent, extending the biggest round of reductions since 1991. While economic growth last quarter was the slowest in eight years, Australia has so far avoided a recession, unlike the U.S., U.K., Europe and Japan.

“We have scope to move both monetary and fiscal policy in an expansionary direction,” MacFarlane told a gathering of the Lowy Institute for International Policy in Sydney today. “Australia is better placed than any other Organization for Economic Cooperation and Development country I can think of.”

Australia’s government has posted budget surpluses for most of the decade and the central bank’s key overnight cash rate is more than four times higher than the U.S. Federal Reserve’s benchmark rate, and 100 basis points higher than the European Central Bank’s 3.25 percent key rate. To buttress the economy, Prime Minister Kevin Rudd said last week he may allow the government’s budget to slip into deficit.

Macfarlane, the head of central bank between 1996 and 2006, said while the global credit crunch means there is a need for tougher rules, there is “no point in moving to a tougher regulatory regime until we get the present mess sorted out.”

‘Immediate Need’

“The immediate need is to get credit flowing again,” said Macfarlane, who is an adviser to Goldman Sachs Group Inc. “We must return to a situation where lenders will be prepared to take the normal commercial risks, without which no economy can function.”

From an international perspective, Macfarlane said the current situation is more serious than the dot-com bubble, the 1998 Long Term Capital Management hedge fund bailout, the Asian financial meltdown a decade ago, the mergers-and-acquisition bubble of the late 1980s, the 1987 share market collapse, the 1980s U Free Credit Report and Score.S. savings and loan crisis, and the so-called third world debt crunch of the early 1980s.

“We have never seen such a freezing up of lending between the banks before, and we have never seen a situation where in the U.S., the U.K. and Europe, so many banks and other financial institutions have had to be fully or partially nationalized in order to prevent their collapse,” he said.

Macfarlane said the crisis has also “invalidated” the model of a deregulated financial system that has operated in recent decades by transmitting instability among banks to the wider economy.

U.S. Tarnished

“It has failed the market test: it has lost its owners, that is shareholders, vast amounts of money,” Macfarlane said. “It has also greatly reduced the moral authority of the U.S. in international financial affairs.”

Stevens, who lowered borrowing costs by three percentage points since September, said yesterday that monetary policy is now “expansionary” to help restore consumer and business confidence amid a 44 percent plunge in the benchmark S&P/ASX 200 stock index and the biggest decline in home prices since 1978.

For Australia, the global turmoil has been less serious, Macfarlane said. “Our banks remain well-capitalized, profitable and not exposed to subprime mortgages locally or in the U.S.,” he said.

“Mortgage arrears in Australia are miniscule by world standards and most of the corporate sector is moderately geared,” the former governor said. “If we had to make a judgment on whether our system was fundamentally unstable, we would have to say we see no evidence to suggest it.”

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Chancellor Angela Merkel swept aside calls to cut taxes now rather than wait until after next year’s national election, saying that her party “must have the courage to swim against the tide” to tackle the economic slowdown.

A meeting of her coalition on Jan. 5 will review the economic situation and consider whether further steps are needed to mitigate the worst recession in 12 years, Merkel said today in a speech to a convention of her Christian Democratic Union in Stuttgart.

“Germany will keep all its options open to combat the impact of the global crisis effectively,” she said. “I emphasize: all options.” At the same time, “what we won’t do is undertake a structural overhaul of the tax system.” Instead, any measures will be “temporary economy stimuli that have immediate effect.”

The chancellor’s resistance to immediate tax cuts flies in the face of calls from industry, economists and sections of her own party to provide a fiscal stimulus to help the economy, Europe’s biggest, ride out the global downturn. Retail sales unexpectedly fell in October, the Federal Statistics Office said today, suggesting a more severe recession than first predicted.

Election ‘Promises’

“Merkel wants to keep her tax gifts as promises for the election — that’s irresponsible and possibly even a grave mistake,” Thomas Mayer, chief European economist at Deutsche Bank AG in London, said in an interview. “The economy is faltering and she needs to stimulate private consumption, which has been stagnating for years.”

Merkel’s position was strengthened after leading party members yesterday backed her proposal to postpone any tax overhaul until after the national election in September 2009. She received further support today when she was re-elected party chairwoman with 94.8 percent of the ballots cast, an increase on the 93.1 percent backing she won in 2006.

Still, Germany has attracted criticism from economists and international media for the value of its stimulus measures in comparison to other countries. Merkel’s Cabinet last month agreed on a program of measures costing 32 billion euros over two years, equivalent to 1.3 percent of its gross domestic product, the chancellor said today. That compares to Italy’s 80 billion-euro package and a program of 38 billion euros in Spain.

‘Senseless Competition’

Germany won’t get into a “senseless competition” with other countries over how many billions to spend bolstering the economy, Merkel said.

In Britain, Prime Minister Gordon Brown’s government last week reduced the U.K.’s sales tax to 15 percent from 17.5 percent to spur consumer demand. Merkel should follow suit with a temporary cut in value-added tax, a sales tax, to stimulate purchases of goods from cars to computers, according to Deutsche Bank’s Mayer. “The U.K.’s move to cut VAT is the right in decision in the wrong country,” he said payday loans cash.

Bild, Germany’s biggest-selling newspaper, meanwhile urged Merkel in today’s edition to emulate Ludwig Erhard, “the father of Germany’s economic miracle” after World War II, and “save prosperity for all.” Lowering taxes “offers hope” to consumers and business, Bild cited Erhard as having said.

“The earlier the reform of taxes, the better for growth and jobs,” Economy Minister Michael Glos, from the CDU’s Bavarian sister party, the Christian Social Union, said in an editorial published today on the ministry Web site.

Glos joins Merkel’s five independent economic advisers, or “wise men,” who called on the government in their annual report published Nov. 12 to stimulate the economy by increasing disposable income. They urged additional measures of as much as 1 percent of GDP, or about 25 billion euros, on top of the program already agreed on.

‘Year of Bad News’

“Germany will continue to analyze the economic situation,” Merkel told as many as 1,000 delegates registered for the convention. “Since we know that 2009 will be a year of bad news, we will with our stimulus measures build a bridge for investment and employment, a bridge for our citizens and companies, ensuring that recovery takes place in 2010.”

The Social Democrats, Merkel’s coalition partners and rivals at next year’s election, oppose tax cuts, arguing that the government should hold to its commitment to balance the federal budget.

‘Gunpowder Dry’

“We should keep our gunpowder dry for now,” Foreign Minister Frank-Walter Steinmeier, the Social Democrat who will be Merkel’s opponent for the chancellorship, said in an interview today with the newspaper Handelsblatt. “I’m skeptical of taking a watering can and spreading benevolence across the country — that goes for tax cuts for people who seem to be able to save enough already.”

The coalition’s economic-stimulus package and 500 billion- euro bank-rescue program have already forced it to abandon a plan to balance the budget by 2011. The government will not “lose sight” of its budget goal, and will pursue the target in the next legislative period after the election, Merkel said.

Merkel, whose party faces a state election in Germany’s financial heartland of Hesse on Jan. 18, followed by three more state elections in August before the national vote in September, said 2009 will be a “super-election year.”

Even so, faced with the global economic crisis, “electioneering by the main parties is definitely on a low flame right now,” Hans-Juergen Hoffmann, managing director of Berlin-based polling company Psephos GmbH, said in an interview. “The parties have to pull together and voters know this.”

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Pakistan obtained a $7.6 billion bailout from the International Monetary Fund to help prevent the country defaulting on its debt.

The State Bank of Pakistan, which this month raised its benchmark interest rate to 15 percent from 13 percent, has committed as part of the aid to “further tighten monetary policy as needed,” the IMF said in a statement in Washington yesterday. South Asia’s second-largest economy will be able to immediately draw upon $3.1 billion of the loan, it said.

President Asif Ali Zardari, facing pressure from the U.S. to step up the fight against Taliban and al-Qaeda insurgents along the border with Afghanistan, needs IMF financing to prop up Pakistan’s ailing economy. The nation’s foreign-exchange reserves have shrunk 75 percent in 12 months to $3.45 billion and economic growth is forecast to slump to a seven-year low.

Pakistan’s rupee gained 0.44 percent against the dollar to a seven-week high of 78.70, as of 11:15 a.m. in Karachi. The currency has declined as much as 26 percent this year as foreign investors spooked by the global credit crunch withdraw funds from emerging markets. The yield on the benchmark 9.6 percent bond due August 2017 held at 15 percent.

The loan from the IMF “will ease constraints on foreign currencies and it will boost the confidence of overseas and domestic investors,” said Samiullah Tariq, an economist at InvestCapital & Securities Ltd. in Karachi. “Now investors know that there will be a lot more fiscal discipline.” He said he expects rupee to strengthen to 75 against the dollar in a month.

Global Recession

The IMF has approved more than $40 billion of loans in recent weeks to prevent the global financial crisis and recession from undermining the stability of developing nations. Ukraine, Serbia and Iceland have already got funds from the IMF. Belarus has requested $2 billion and Turkey may also agree to emergency funding.

“The Pakistani economy was buffeted by large shocks during fiscal year 2007 and 2008, including adverse security developments, higher oil and food import prices and the global financial turmoil,” said IMF Deputy Managing Director Takatoshi Kato business cards online. “By providing large financial support for Pakistan, the IMF is sending a strong signal to the donor community about the country’s improved macroeconomic prospects.”

Pakistan expects the IMF loan will help it win additional aid from a group of other lenders and donor nations, including the U.S., U.K., China and Saudi Arabia. The group’s Nov. 17 meeting in Abu Dhabi adopted a “work plan” for financial help to Pakistan, the Foreign Ministry has said.

‘Significant Tightening’

To secure the IMF loan, Pakistan agreed to a “significant tightening of fiscal policy” and an end to central bank financing of the government. Pakistan plans to reduce its budget deficit to 4.2 percent of gross domestic product in 2009 from 7.4 percent in the past financial year, according to the Washington-based lender.

The cost of insuring a $10 million Pakistani government bond against the risk of default has more than doubled since the end of September to $2.28 million a year from $987,000 per annum, according to CMA Datavision.

Last week Pakistan’s government said the country’s $150 billion economy was expected to expand 4.3 percent in the fiscal year ending June 2009.

Growth is easing after central bank Governor Shamshad Akhtar on Nov. 12 increased interest rates by the most in more than a decade to curb inflation, which jumped to a 30-year high of 25.33 percent in August.

Pakistan completed its last IMF program in 2004 with a credit rating from Standard & Poor’s of B+, four levels below investment grade. S&P cut the nation’s rating to CCC on Nov. 14, one day before the latest IMF loan was announced, citing a risk of default on external debt payments.

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Japan is sliding back into deflation as slumping global demand cuts exports, prompting companies to cut jobs and reduce spending, said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo.

“Japan will go back to deflation'' that plagued the country for 10 years until 2007, Morita said in an interview. “The global financial crisis is forcing companies to cut jobs and keep a lid on investment.''

Exports declined at the fastest pace in almost seven years in October, worsening the outlook for an economy that sank into a recession in the third quarter. Isuzu Motors Ltd., Japan's largest maker of light-duty trucks, said today it will cut 1,400 contract workers and Mazda Motor Corp. said it would shed 500.

“We are at a phase where the economy is going to suffer severely from weakness in domestic demand, joining the decline in exports,'' Morita said. Consumer spending accounts for about 55 percent of Japan's economy.

Deflation is most likely to return to Japan in the three months starting July 2009, a year after inflation peaked at 2.4 percent, the fastest pace in 11 years, Morita said cash loan in one hour. Higher prices for food and fuel costs earlier this year left consumers with less to spend, causing household spending to 2.3 percent in September.

Falling prices may prompt Bank of Japan Governor Masaaki Shirakawa to return to the so-called quantitative easing policy that keeps interest rates close to zero percent and floods the money market with cash.

Zero Rate Policy

The central bank introduced the policy in March 2001 to overcome deflation and support economic growth. It ended the policy five years later.

A brief return to deflation in Japan wouldn't necessarily be a bad for the economy, some economists said.

“It is crucial to distinguish between a few quarters of negative inflation due to the unwinding of the commodity price shock, and a more sustained period of generally falling wages and prices,'' said Julian Jessop, chief international economist at Capital Economics in London. “The former would provide a welcome boost to real incomes and consumer confidence.''

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Turkey's central bank will probably leave the benchmark interest rate unchanged at more than five times the rate in the euro zone this week to defend the lira from the impact of the global economic crisis.

The bank will keep the overnight borrowing rate at 16.75 percent, where the Ankara-based lender has held it since July, according to all 16 economists surveyed by Bloomberg. The bank will announce its decision at 7 p.m. on Wednesday, Nov. 19.

Turkey is holding the cost of borrowing high, even as developing economies reduce their rates, to preserve the value of the lira and protect companies that have foreign currency debts. The lira has fallen 21 percent against the dollar since the start of October. The global uncertainty means Turkish monetary policy must remain “cautious,'' the bank said on Oct. 31.

“The bank's major concern has to be the lira,'' said Yarkin Cebeci, economist for JPMorgan Chase & Co. in Istanbul. “They know that any easing would be perceived as premature and have a negative impact on the lira.''

Turkish companies had foreign currency debts that exceeded their assets by $81.4 billion liras at the end of June, according to the latest data from the central bank. A decline in the local currency would fuel inflation by driving up import costs and would raises doubts over firms' ability to finance their borrowing.

Turkey's credit rating outlook was cut to negative from stable by Standard & Poor's on Nov. 13 on concern the country's banks will struggle to meet their financing needs next year because of the global credit crisis.

Rating Cut

Turkey's government and the International Monetary Fund are close to signing a new economic accord, Prime Minister Recep Tayyip Erdogan said Nov free credit score. 15. “We are at a point very close to a solution,'' Erdogan told reporters after a press conference in Washington, where he attended a summit of leaders from the world's largest economies to discuss the global financial crisis.

Dominique Strauss-Kahn, the IMF's managing director, said at a press conference he is confident of reaching agreement on a new accord soon.

Inflation accelerated to 12 percent in October from 11.1 percent a month earlier. The bank is aiming to slow consumer- price growth to 7.5 percent by the end of next year.

The statistics office will announce unemployment data for the three months through September today at 10:00 a.m. in Ankara. The jobless rate in the three months to August was 9.4 percent, the highest summer jobless rate since the measure began in 2005.

Consumer Confidence

The office will also release November consumer confidence figures today. The CNBC-E channel's measure of confidence fell to its lowest since 2002 in October, the channel said on Nov. 3.

The benchmark ISE National 100 Index fell 4.6 percent last week as the global credit crunch brought fears of a recession and cut appetite for investments in emerging markets such as Turkey. The lira weakened almost 4 percent to 1.6063 per dollar as of late Nov. 14. The yield on the benchmark lira bond tracked by ABN Amro rose 56 basis points to 22.16 in the week.

Koc Holding AS, Turkey's biggest company, is due to report third-quarter earnings this week. It hasn't specified a date yet.

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The U.S. downturn will be the longest in three decades, and the drought in consumer spending may be the worst ever, according to economists surveyed by Bloomberg News.

The implosion of credit markets last month will cause the economy to shrink at a 3 percent annual rate in the fourth quarter and decline at a 1.5 percent pace in the first three months of 2009, according to the median estimate of 59 economists surveyed Nov. 3 to Nov. 11. Following last quarter's 0.3 percent drop, the slump would be the longest since 1974-75.

“The economy fell off a cliff in October,'' said Richard Berner, co-head of global economics at Morgan Stanley in New York. “We had a huge financial shock that intensified the credit crunch and triggered a sharp downturn.''

Declines in household spending will extend into next year as the worst financial crisis in seven decades forces employers to keep cutting payrolls on top of the 1.2 million jobs already lost this year. President-elect Barack Obama has said the U.S. needs a second economic stimulus package “sooner rather than later.''

The pace of contraction this quarter would be the worst since 1990. Berner is among economists projecting the current slump will also be the most serious in a quarter century as the lack of credit causes a reinforcing, vicious circle of declines in confidence, spending and hiring.

“All of these adverse feedback loops are working to reinforce the downturn,'' he said. “At the moment, it looks like the deepest U.S. recession since '81.''

Some members of the group that officially determines when U.S. contractions begin and end are even more pessimistic.

`Serious Recession'

“We're in for a pretty serious recession,'' Jeffrey Frankel, a member of the business-cycle dating committee of the National Bureau of Economic Research, said in a Nov. 10 interview with Bloomberg Television. “There's a chance it'll be the worst postwar recession.''

In addition to gross domestic product, the group tracks changes in payrolls, production, income and sales to make their call. The NBER usually declares a recession 12 to 18 months after it starts. The odds of an official contraction occurring within the next 12 months rose to 100 percent, according to this month's survey, up from 90 percent in October.

After dropping at a 3.1 percent pace in the third quarter, consumer spending will fall 2.9 percent this quarter and 1 short term cash loans.3 percent in the first three months of 2009, according to the survey median. Spending, which accounts for more than two-thirds of the economy, has never fallen for three consecutive quarters in the postwar era.

Rising Unemployment

Falling demand will cause an even bigger increase in unemployment than projected last month. Economists surveyed forecast the jobless rate will rise to 7 percent in the first quarter of 2009, up from last month's forecast of 6.6 percent. The rate will climb to 7.7 percent by the end of 2009, the highest level since 1992, the survey showed.

The jobless rate rose to 6.5 percent in October, the highest since 1994, the government said last week. Employers cut 240,000 jobs last month and the total number of unemployed Americans jumped to 10.1 million, the highest level in a quarter century.

“The combination of the credit crunch and the rapid decline in consumer spending were the two drivers'' behind the weakening employment outlook, said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina.

The economic slump is contributing to a plunge in commodity prices that spells good news for inflation. Consumer prices will rise 1.8 percent next year, the smallest gain since the last official recession in 2001, after increasing 3 percent this year, the survey showed.

Less Inflation

The diminishing threat of inflation will give the Federal Reserve leeway to lower interest rates again, the survey showed. The benchmark rate, now at 1 percent, is likely to fall to 0.5 percent by March, its lowest level ever.

Obama, in his first post-election press conference, last week said he would follow up on any fiscal stimulus passed by Congress in the last weeks of the Bush administration with further measures after his Jan. 20 inauguration. Already, the government has approved a $700 billion financial rescue package, on top of wide-ranging measures from the Fed to boost liquidity.

“We have taken some major action to date, and we will need further action during this transition and subsequent months,'' Obama said.

U.S. automakers have been among the hardest hit by the slump in spending. Vehicle sales plunged in October for a 12th straight month, the longest streak in 17 years, overwhelming efforts by General Motors Corp., Ford Motor Co. and Chrysler LLC to cut costs by trimming payrolls and shutting factories.

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Fitch Ratings cut its debt ratings for four Eastern European countries and downgraded the outlook for Russia, South Korea and Mexico as the global slowdown spreads to emerging economies.

Bulgaria, Hungary, Kazakhstan and Romania had their sovereign ratings cut as part of a review of 17 emerging-market economies, Fitch said in a statement today. The outlooks for Chile, Malaysia and South Africa were also lowered.

The U.S., Japan and the euro zone will all shrink next year, the International Monetary Fund said last week, weakening demand for goods exported from developing nations. The global financial crisis is also making it more difficult for emerging economies to attract foreign capital, putting a strain on their currencies and finances and prompting countries including Hungary and Pakistan to ask the IMF for loans.

“The profound shift in the global economic and financial outlook pose significant real economy and policy challenges for emerging markets,'' David Riley, London-based head of global sovereign ratings at Fitch, said in a statement. “The risks of economic and financial stress that could undermine sovereign creditworthiness have risen.''

Emerging Europe is the “most vulnerable'' to worsening global financial and economic conditions because of its high debt and current-account deficits, Fitch said.

Hungary's Recession

Hungary's long-term, foreign-currency rating was cut one level to BBB, the second-lowest investment grade, in light of “the severity of the recession'' and “foreign-currency mismatches in the private sector,'' Fitch said Faxless pay advances. Still, it added that the country's $20 billion in IMF-led support “largely removed external financing and liquidity risks.''

Bulgaria's one-level cut to BBB-, the lowest investment grade, reflects “the increasing risk of a recession in response to a marked decline in external financing flows,'' Fitch said.

Russia's outlook was revised to “negative'' because “room for policy maneuver is constrained by the risk of deposit and capital flight, the systemic weakness of the banking system and relatively high inflation.'' The country still maintains an “exceptionally strong balance sheet,'' Fitch said.

South Korea's outlook was also cut to “negative,'' on concern the country's foreign-exchange reserves may decline as the nation faces the biggest crisis since it needed an IMF bailout in 1997.

Malaysia's outlook worsened to “stable'' from “positive,'' reflecting the drop in commodity prices and weakening demand for the nation's electronics exports, Fitch said. Mexico's was cut to “negative'' because of a U.S. recession, reduced capital flows and lower oil prices.

Fitch affirmed the ratings of Brazil, China, India, Peru, Poland, Taiwan and Thailand.

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