Bloomberg

The pound tumbled below $1.53 in its biggest drop in at least 37 years after a report showed the U.K. economy contracted more than forecast in the third quarter, bringing the nation to the brink of a recession.

The decline surpassed that of Black Wednesday in September 1992, when the U.K. was driven out of Europe's Exchange Rate Mechanism. Gross domestic product contracted 0.5 percent in the three months through September, the Office for National Statistics in London said today, more than the 0.2 percent forecast by analysts in a Bloomberg survey. The FTSE 100 index slumped as much as 9.1 percent and the yield on the U.K. 10-year gilt headed for its biggest weekly decline in a decade.

"This is once-in-a-lifetime stuff, we're all sat under our desks with tin hats on,'' said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. "The U.K. is in the first step toward a recession and the dollar's bid because of repatriation flows.''

The U.K. currency fell to $1.5269, the lowest level since August 2002, and was at $1.5282 at 10:39 a.m. in London, from $1.6230 yesterday. Against the euro, the pound weakened to a record 81.96 pence, dropping for a fifth day, from 79.69 pence.

A collapse in credit markets and the worst housing slump in a generation have buffeted the British economy, Europe's second- biggest. The U.K. is already in a recession and the economy will contract for the next three quarters, Ernst & Young's ITEM Club, which uses the same forecasting model as the Treasury, said in a report on Oct. 20.

`Black Wednesday'

Today's decline brought this week's drop versus the dollar to 11.5 percent. The currency lost 9.8 percent in the week when billionaire investor George Soros and other speculators drove it out of the Exchange Rate Mechanism that linked the currency to the deutschmark. The then-U.K. Prime Minister John Major pulled the pound out of the ERM on Sept. 16, 1992. Current Prime Minister Gordon Brown, formerly Chancellor of the Exchequer, described that day as "Black Wednesday.''

"If anyone had forecast a 10-cent change in the pound this week, it would have been a complete punt,'' said Paul Robinson, a London-based foreign-exchange analyst for Barclays Capital.

House prices will continue to fall and the pound may depreciate further, King said in a speech to executives in Leeds, England on Oct. 21.

Prime Minister Brown predicted the next day that the U.K. will slip into a recession for the first time since he took charge of Britain's finances in 1997. The remarks were Brown's first admission that the country's longest unbroken streak of economic growth in more than a century is over.

"The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand,'' King said. The Monetary Policy Committee ``will act promptly to ensure that inflation remains on track to meet our target.''

Rate-Cut Bets

Traders are starting to speculate the Bank of England will lower its benchmark interest rate by as much as three-quarters of a percentage point by year-end to revive the economy. The odds of a cut of that magnitude were 5 percent yesterday, a Credit Suisse Group AG index of derivatives showed.

Government bonds rose, with the yield on the two-year gilt falling 15 basis points to 3.08 percent. The 4.75 percent note maturing June 2010 climbed 0.23, or 2.3 pounds per 1,000-pound ($1,530) face amount, to 102.60. The yield on the 10-year security dropped 15 basis points to 4.32 percent, on course for its biggest weekly decline since at least 1998. Bond yields move inversely to prices.

With the financial crisis engulfing developing countries from Latin America to Central Europe, raising the specter of market panic and even social unrest, Western officials are weighing coordinated action to try to stabilize these economies.

New York Times

The International Monetary Fund, which is in negotiations with several countries to provide emergency loans, is also working to arrange a huge credit line that would allow other countries desperate for foreign capital to borrow dollars, according to several officials.

The list of countries under threat is growing by the day, and now includes such emerging-market stalwarts as Brazil, South Africa and Turkey. They have become collateral damage in a crisis that began in the American subprime housing market.

The fast-growing economies of the developing world depend on money from Western banks to build factories, buy machinery and export goods to the United States and Europe. When those banks stop lending and the money dries up, as it has in recent weeks, investor confidence vanishes and the countries suddenly find themselves in crisis.

Details of the arrangement are still being worked out, but it could be supported by Japan and several oil-producing countries, a fund official said. The fund has not yet approached the Federal Reserve, according to officials, although the Treasury Department has expressed interest.

Two weeks ago, the Fed set up unlimited swap agreements with the European Central Bank, the Bank of England and other central banks to ease the severe credit turmoil in Western Europe.

This time, the focus would be on emerging markets, with good economic records, which are having trouble borrowing dollars.

“There needs to be some action to help these countries,” said Neil Dougall, chief economist for emerging markets at Dresdner Kleinwort in London. “There has been a severe drying up of liquidity there, and it is early days. The tsunami has only just reached their shores.”

The monetary fund has about $250 billion available for all types of loans. That could be supplemented by funds from central banks, officials said, though they dismissed a rumor that circled the globe on Thursday that the fund was arranging a $1 trillion credit line.

Whatever the amount ultimately pledged, it would represent the most concerted international response yet to what economists warn could be a volatile, dangerous new phase in the crisis.

“We view it seriously,” said Clay Lowery, assistant Treasury secretary for international affairs. “There are a lot of emerging markets that have come under increased pressure recently.”

Unlike in the United States and Western Europe, banks in these countries bought few of the mortgage-related securities that undermined the financial system. But as banks stopped lending — either to each other or anyone else — that credit squeeze has hit emerging markets hard.

Stock markets and currencies have plunged, foreign capital has fled, trade flows have slowed, and in an echo of past financial crises, investors have begun to worry about governments’ defaulting. Many have heavy debts in foreign currencies, but the cost of repaying that debt has increased as their home currencies’ values have declined. To compensate, they are seeking dollars to repay the loans.

On the list of endangered countries, economists put: Hungary, Russia, Ukraine, Pakistan, Turkey, South Africa, Argentina, Iceland, Estonia, Latvia, Lithuania, Romania and Bulgaria.

The economic woes of these countries could reverberate back to the United States, experts say, because many of them are trading partners, at a time when exports are one of the few bright spots in the American economy.

“Our whole economic prospects are going to turn on whether the emerging markets keep growing,” said C. Fred Bergsten, the director of the Peterson Institute for International Economics. “It could be the difference between a moderate downturn and a deep downturn.”

The crisis has been indiscriminate in its victims. It has worsened the problems in countries like Iceland, Ukraine and Argentina, which had festering economic or political troubles. Argentina, in particular, has drawn criticism from economists for its decision this week to nationalize the country’s private pension funds, worth $30 billion.

But the turmoil also hit South Africa and Turkey, which economists had praised for their sound policies.

Among the earliest victims have been countries, like Hungary, where companies and even individuals borrowed heavily in foreign currencies. As credit dried up and their local currencies plummeted, they have been unable to roll over those loans. In even healthy countries, near panic has ensued — leaving people bewildered by the sudden reversal in their fortunes.

“We were not an obvious target,” said Peter Akos Bod, a former governor of the Hungarian central bank. “I could not see major problems in Hungary’s economic outlook. But there is sort of a panic.”

Economists say the inability to borrow foreign currency is dangerous because it can quickly turn healthy economies into sick ones, as companies and even potentially governments default on loans.

“Right now, it’s a liquidity problem, but if it goes on long enough, it can become a solvency problem,” said Yusuke Horiguchi, the chief economist of the Institute for International Finance.

Mr. Horiguchi said that developed economies bear responsibility for easing this problem, because it stems from the crisis in their banking system.

Indeed, the financial rescue packages announced by the United States and European countries have aggravated the problem. Safeguards like attempts to stabilize their banks and government guarantees behind some bank lending have made banks in developing countries look less secure.

In a gesture to the precarious situation, President Bush made an unscheduled appearance this month at a meeting of finance ministers from the Group of 20 countries, organized by the Treasury secretary, Henry M. Paulson Jr. Mr. Bush also agreed to convene an emergency meeting of the group on Nov. 15 to develop responses to the crisis.

Beyond reassuring words, there is a limit to what the United States can do to solve the problems of these countries. Mr. Paulson is overseeing the largest economic rescue program since the Great Depression. He cannot devote anywhere near the amount of time that a predecessor, Robert E. Rubin, devoted to the Asian and Mexican crises during the Clinton administration.

“The most important thing the United States can do is stabilize its financial system,” Mr. Lowery, of the Treasury, said. “The other thing we can do is to support the actions taken by emerging-market countries.”

On Thursday, the central banks of Brazil and Mexico intervened heavily in the foreign exchange market to support their currencies. Hungary obtained a loan of up to 5 billion euros from the European Central Bank.

And Hungary — along with Iceland, Pakistan, Belarus and Ukraine — has overcome deep reluctance and begun negotiations with the International Monetary Fund for emergency loans. Countries are traditionally averse to such loans because they come with strict conditions.

“I’m totally unhappy about having to borrow from the I.M.F.,” Mr. Akos Bod, the Hungarian central banker, said. “I thought in my lifetime, we would never have to borrow from the I.M.F.”

As the largest shareholder in the fund, the United States can exert influence on its policies. Administration officials said the highest-ranking American at the fund, John Lipsky, the first deputy managing director, would lead the fund’s effort to extend loans to a broader range of countries.

The idea, they said, was proposed at a board meeting on Wednesday by Dominique Strauss-Kahn, the French managing director, who is the subject of an internal investigation into whether he abused his power in conducting a brief affair with a worker at the fund.

Economists praised the idea of giving emerging markets access to dollars. But the key to the effort’s success, they said, is whether the fund can line up support from central banks.

“The I.M.F. has only $200 billion of its own resources, which is not enough collateral,” Simon Johnson, a former chief economist of the fund, said. “It would be spectacular if they could pull this off.”

Reuters

Vietnam's key stock index fell more than 4 percent on Friday, hitting its lowest in 32 months, as domestic investors unloaded shares following foreign investors' sales in recent weeks.

The main Ho Chi Minh Stock Exchange .VNI, the world's worst performer this year, dropped 4.25 percent to close at 345.11 and has now lost 62.8 percent this year after a gain of 23 percent in 2007.

'Domestic investors have been selling shares due to pessimism about strong foreign sales recently,' Vu Duy, a trader with Hanoi-based Kim Long Securities Company KLS.HN, said.

Friday's volume jumped nearly 13 percent from a week ago to 13.2 million shares. The market has seen daily trading volume of around 13 million shares since the start of this week.

Brokers said foreign investors had been net sellers in the past 13 sessions and falls in world stock markets had also hurt investor confidence.

'Bad news around the world markets made local retail investors reluctant to buy,' said Tran Thi Ngoc, an analyst at Hanoi-based Wall Street Securities Co. ($1=16,518 dong) (Reporting by Dang Trung Nghia; Editing by Alan Raybould)