All eyes on policymakers as investors dump stocks

Finance ministers and central bankers from the Group of Seven nations meet in Washington against a backdrop of plunging shares after bank bailouts, liquidity injections and coordinated interest rate cuts failed to get funds flowing again.

U.S. bank Morgan Stanley will be in the spotlight on Friday, with investors unconvinced about its deal with Japan's Mitsubishi UFJ. Shares in Morgan Stanley have lost nearly half their value in the last three days on worries Mitsubishi UFJ may back out of injecting much-needed capital.

In a bid to unfreeze bank lending, the U.S. government is weighing guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits, The Wall Street Journal reported.

European shares traded down nearly eight percent, having already lost more than 15 percent in the four days to Thursday's close. They were at their lowest level since 2003.

Japan's Nikkei tumbled nearly 10 percent, registering its biggest one-day drop since a 1987 crash and losing nearly a quarter of its value in a week.

"This is panic," said Takashi Ushio, head of investment strategy at Marusan Securities in Tokyo.

The crisis claimed its first Japanese financial institution -- unlisted Yamato Life Insurance Co., which had $2.7 billion debts. The government looked to prop up smaller banks.

Focus was on the G7 meeting later on Friday and on a meeting of G20 ministers -- which includes large emerging economies such as Brazil -- on Saturday.

The ministers and bankers face intense pressure to coordinate a response to restore faith in the financial system.

"It's time for the 'kitchen sink' -- as in, throw everything there is at the problem and in such scale that the 'shock and awe' break the current cycle of fear," Charles Diebel, a rate strategist at Nomura, said in a note to clients.

CAPITAL INJECTION
A crisis which began with the collapse of the U.S. housing market has destroyed lenders from Wall Street to Iceland. Much of the industrialized world is on the brink of recession and people are scared about losing their savings and jobs.

The U.S. authorities last week approved a $700 billion bank bailout and central banks around the world cut interest rates in unison on Wednesday.

However, credit markets remain in deep distress. With banks desperate to protect capital, the interbank cost of borrowing dollars rocketed.

Indicative rates for three-month interbank dollar loans -- what banks charge each other to borrow -- have hit their highest level since the end of 2000. But there was also little indication of any actual borrowing or lending.

As a result, the U.S. Treasury plans to start injecting capital into U.S. banks as soon as this month, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.

That partial nationalization of American banks would represent an enlarged role for the U.S. government as the lender and investor of last resort.

U.S. policy had focused on a plan to buy banks' distressed assets. Many analysts say a move to shore up banks' capital would be a more direct way to break a logjam in credit markets that has shut down new borrowing for consumers and businesses.

British Prime Minister Gordon Brown said other governments should follow Britain in putting money into struggling banks and offering guarantees worth hundreds of billions to persuade banks to start lending to each other.

"Because this is a global problem, it requires a global solution," he wrote in The Times newspaper.

IMF OFFER
Late on Thursday, the International Monetary Fund said it was ready to lend to countries hit by the global credit crunch and had activated an emergency financing mechanism first used in the 1990s Asian crisis.

Japanese Prime Minister Taro Aso said Japan would propose at the G7 meeting that Iceland be helped via the IMF - an idea the north Atlantic nation has so far resisted.

Iceland has taken control of its largest banks and halted all trade on its stock market as it battles to stave off the threat of national bankruptcy.

Home to just 300,000 people, Iceland epitomized the global credit boom that turned to bust. Its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign money poured into local projects.