Banks inject billions to stop the rot

Desperate to avert a financial meltdown not seen since the Great Depression, world banks pumped an extra $A225billion into markets last night in a bid to shore up the international trading system.

As the worldwide credit crunch sparked a $29 billion rout at the Australian Stock Exchange yesterday, last night's extraordinary international rescue bid seemed to stop the downward spiral in Europe. Three days of losses were finally halted in early afternoon trading.

Analysts said the gains in European markets were largely the result of the massive cash injection.

The unprecedented concerted action by central banks in the US, Europe, Britain, Japan, Switzerland and Canada to staunch the bleeding saw the provision of a $US180billion cash line through currency swaps.

In Australia, the Reserve Bank has now pumped $11billion into the market, but there are fears over the health of the country's largest investment bank, Macquarie Bank.

Responding to the credit crisis yesterday, Australian investors retreated to the safe haven of gold the precious metal posting its biggest one-day price rise in nine years. Gold futures for December delivery put on $US70 an ounce, to end at $US850.50 an ounce.

With the bail-out of insurance giant American International Group failing to calm the storm affecting world markets, the benchmark S&P/ASX200 slumped by 114.9 points or 2.43 per cent over fears the crisis on Wall Street would continue.

An adverse ratings outlook by Standard and Poor's saw shares in Macquarie Bank slump to a near 512-year low of more than 23 per cent to $26.05, leading some analysts to question the viability of its business model.

Stocks in the US fell nearly 5 per cent and US financial stocks lost nearly 9 per cent.

Uncertainty about the Australian bank BankWest continued as its owner, Britain's largest mortgage lender, HBOS, said it would be sold to Lloyds TSB for $28billion.

And reports suggested last night the credit crisis may have claimed a new victim, with investment bank Morgan Stanley looking for help.

Prime Minister Kevin Rudd and Treasurer Wayne Swan reiterated yesterday that the Australian financial institutions were in a superior position to their international counterparts.

''The advice of the regulators is still that Australia's financial institutions are in sound shape, that the order of their balance sheets is strong,'' Mr Rudd said.

Mr Swan said Australia's largest four banks were among only 12 of the world's top 100 banks with an AA credit rating or more.

But Mr Rudd was forced to defend his decision to head to New York next week amid growing concerns about how shockwaves from the global credit crisis will reverberate in Australia.

The Opposition accused Mr Rudd yesterday of neglecting the country.

Liberal Senator Bill Heffernan listed 16 countries Mr Rudd had visited during his time in office, sparking a spirited defence from Government Senate leader Chris Evans, who said Mr Rudd was promoting Australia's interests abroad.

Mr Rudd said last night it was more important than ever for him to build relationships with crucial overseas players.

He met key officials including US Federal Reserve Board chairman Ben Bernanke, US Treasury Secretary Henry Paulson , World Bank president Robert Zoellick and International Monetary Fund head Dominique Strauss-Kahn during a visit to the US in March. ''I had a deep sense then that these relationships were going to be critical as the year unfolded,'' he said.

''I have been on the phone and had other meetings with a number of these individuals since then and it's very important that those discussions be renewed and there are concrete practical reasons for it.''

Mr Rudd accused new Opposition leader Malcolm Turnbull earlier in Parliament of talking down the economy. Mr Turnbull said yesterday he would not quite use the same terminology as the Reserve Bank governor, who had previously said ''... conditions in Australian banks are light years away from what's happening in other banking systems around the world''.

''The world is a much more connected place than that,'' Mr Turnbull said.

Positive news came with the issuing of figures yesterday showing Australian banks continued to have a low exposure to bad debt.

Reserve Bank figures showed the bad loans ratio of Australian banks at only 0.36 per cent in the June quarter, well below the decade average of 0.44 per cent. But the latest ACCI Westpac survey of industrial trends showed slowing job creation and confidence slipping to its lowest level in five years, prompting the Chamber of Commerce to call for further Reserve Bank rate cuts.