Investors cautious amid turmoil

Asian share prices have continued to fall as confidence remains low

European stocks rise in cautious trade as Lloyds TSB’s takeover of UK lender HBOS dispelled some of the gloom hanging over financial markets.

Asian shares had earlier fallen sharply on fears that more companies could fall victim to the global financial crisis.

London’s FTSE 100 index was up 0.8% at 4,951 points shortly after the open and France’s main stock index rose 0.6%.

In Asia, Tokyo’s Nikkei share index dropped by 2% while Hong Kong’s main stock index slid by 7%.

Share indexes in Shanghai, Taiwan and India fell by between 3 and 5%.

Hong Kong’s Hang Seng index dropped below the 17,000 mark and Australian shares closed 4% lower.

On Wednesday, the Dow Jones index of leading US stocks fell by more than 4%.

Flight to safety

Brokers in Japan say the markets are in freefall because investors fear the US government’s efforts to stop the turmoil in the financial system are not working.

As a result, investors are looking for safer places to put their money than stocks and shares.

Traders saw plummeting shares on Wall Street on Wednesday

Many Japanese institutions have assets insured by AIG, the insurance company that was rescued by the US government on Tuesday.

And in Singapore, for the second day running, hundreds of AIG policyholders queued up outside its offices trying to surrender or cancel policies they fear could turn out to be worthless.

Feverish speculation

The US Federal Reserve’s AIG rescue package followed the collapse earlier this week of 150-year-old US investment bank Lehman Brothers, which sent shockwaves through the world’s financial community and sparked a global share price plummet.

Another investment bank, Merrill Lynch, has since been sold off to Bank of America. And in the UK, HBOS is being taken over by Lloyds TSB in a £12.2bn deal.

There has also been feverish speculation about the future of two other leading US banks – Morgan Stanley and Washington Mutual.

The New York Times quoted unnamed sources as saying an auction for Washington Mutual was under way. The Wall Street Journal reported that both banking giant Citigroup and Wells Fargo had expressed an interest in a takeover.

Meanwhile the Reuters news agency reported that Morgan Stanley, the second largest US investment bank in the US which on Wednesday saw a quarter of its value wiped off its share price, had held preliminary takeover talks with Wachovia.

None of the companies involved has made any comment on the speculation and no negotiations can be confirmed.

Banks take action

The Bank of Japan has injected another 1.5 trillion yen ($14.4bn; £7.9bn) into money markets to help stabilise them. Australia took similar steps.

The Japanese central bank’s injection was the third consecutive day it had tried to shore up cash markets as the Nikkei trades at a three-year low.

Across Asia, central banks have already pumped $33bn into money markets this week in an attempt to allay investors’ concerns and ensure the supply of funds does not dry up.

Lehman set to go into insolvency

Preparations are being made for Lehman Brothers, the fourth-largest investment bank in the US, to file for bankruptcy.

The two strongest potential buyers appear to have pulled out of talks to rescue Lehman – the latest victim of the American credit crisis.

If no new financing comes before Wall Street opens, it will have to seek “Chapter 11” bankruptcy protection.

This could result in a severe shock to the global financial system, as banks unwind their complex deals with Lehman.

Late on Sunday the US central bank, the Federal Reserve, announced new moves to ease access to emergency credit for struggling financial companies.

The Fed said the step – which broadens the types of securities financial institutions can use to obtain emergency loans – was designed to mitigate the potential risks and disruptions to markets.

In a related move, a consortium of 10 investment banks announced a $70bn (£39bn) loan program that troubled financial companies can use to help ease the credit shortage.

The banks – Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS – each agreed to provide $7bn (£4bn) to the pool.

On Monday, Asian stock markets fell amid concerns over the fate of Lehman Brothers.

Singapore stocks dropped 2.26% in morning trading and shares in Taiwan fell 1.83%.

Markets in Tokyo, Hong Kong, Shanghai and Seoul were closed for public holidays.

Lehman employs about 25,000 worldwide, including 5,000 in the UK.

Accountancy firm PWC has already been lined up to run the British operations of Lehman should the firm go into administration.

BBC business editor Robert Peston says UK bank Barclays’ decision to walk away from a Lehman deal was a huge setback for the effort to rescue the Lehman.

Barclays terminated the negotiations because it was unable to obtain guarantees in relation to financial commitments faced by Lehman when markets open on Monday.

Bad bank, good bank

The rescue effort for Lehman was being co-ordinated by the US Treasury and the New York Federal Reserve.

No other large firm should buy Lehman whole – its toxic real estate and securities are too difficult to value Peter Morici University of Maryland

The US government had hoped to arrange a bailout under which other US investment banks would finance a “bad bank” that would hold the most “toxic” investments of Lehman in the property and mortgage market.

The “good bank” or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK’s Barclays.

Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks.

However, it appears that this plan is falling apart.

“The only thing that can prevent Lehman collapsing would be a huge injection of taxpayers’ money,” a banker close to the talks told the BBC, but added that US Treasury Secretary “Hank Paulson has made it clear he doesn’t want to do that”.

Hard choices

Bank of America, meanwhile, is said to be unconvinced that buying Lehman would be in the interest of its shareholders.

Instead, according to a report in the New York Times, Bank of America is in “advanced talks” to buy investment bank Merrill Lynch for more than $38bn.

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Like other US investment banks Merrill has suffered losses of tens of billions of dollars in the subprime crisis, and has seen its share price plummet during recent months.

“No other large firm should buy Lehman whole – its toxic real estate and securities are too difficult to value,” said Peter Morici of the business school of the University of Maryland.

Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability.

The firm’s share price has plummeted as fears over its future have mounted.

Former Federal Reserve boss Alan Greenspan said the US government faced “very difficult decisions” over Lehman if it could not secure a rescue deal that did not involve public funds.

Yet Mr Greenspan said it would be “unsustainable” for the government to bail out every US bank that got itself into difficulty.

Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem.

“The ordinary course of financial change has winners and losers,” he said.

Oil rises on Opec production curb

Mr Khelil said Opec would re-assess the situation at the end of the year

Oil prices have risen to $104 a barrel in Asian trade, reversing earlier losses, after OPEC agreed to return to its late 2007 production levels.

After talks in Vienna, Opec president Chakib Khelil said the measures to curb over-production amounted to a cut of 520,000 barrels a day within 40 days.

The October US light crude future was up about $1 to $104.20 a barrel after earlier tumbling to near $102.

Prices have sunk from a record of more than $147 a barrel seen in July.

On Tuesday Brent crude had dropped beneath $100 a barrel for the first time since April, and crude prices remain close to $100, below which Goldman Sachs said earlier this week could signal a global recession.

The fall from the record prices in July has helped the US dollar, which hit an 13-month high against the euro on Tuesday.

Supply question

The price has since fallen by nearly 30% as a global economic slowdown has reduced demand for oil.

Supply has also been increased in recent months by some Opec members – principally Saudi Arabia.

Meanwhile, Indonesia has suspended its membership of Opec.

Actions [to curb output] will be taken by members as soon as they can Chakib Khelil, Algerian oil minister

“The conference regretfully accepted the wish of Indonesia to suspend its full membership in the organisation and recorded its hope the country would be in a position to rejoin the organisation in the not too distant future,” Opec said in a statement.

After the late-night talks in Vienna, the group announced it had decided to “strictly” comply to the production ceilings agreed in September last year, which amount to 28.8m barrels a day excluding Indonesia and Iraq.

It linked the falling price of oil to slowing economic growth, a stronger US dollar, easing geo-political tensions and greater supply.

“All the foregoing indicates a shift in market sentiment causing downside risks to the global oil market outlook,” a statement said.

Output curbs

The effect of the measures will be a cut of about 520,000 barrels a day, according to Algerian Oil Minister Chakib Khelil, who chaired the meeting.

“Actions [to curb output] will be taken by members as soon as they can, that means in the next 40 days,” he said.

Opec members will re-assess the situation when the meet again at the end of the year.

The move is a compromise meant to avoid new turmoil in the oil markets, but it also reflects Opec’s attempts to stop the recent falls in global prices.

Russia’s neighbours go their own way

It is easy to assume that escalating tensions between Russia and the West could mean an end to the blurry fudges of the post-Cold War years and a recasting of East-West relations into black and white antagonism, with two opposing camps, each surrounded by its own sphere of influence.

Ukraine’s leader (R) went to Tbilisi to back President Saakashvili

But look at how the Georgia crisis is being received around Russia’s edges. The response is often evasive, and sometimes downright surprising.

Among the countries of the Commonwealth of Independent States (CIS), which 20 years ago were constituent parts of the USSR whose loyalty to Moscow was automatic, Russia has won remarkably few endorsements. Some Central Asian states have sent in aid to South Ossetia. But on the whole the response has been decidedly muted.

To be fair, Georgia too has drawn criticism. But gone are the days when Moscow could rely on satellite states to speak up for it. For Russia’s leaders to declare that Russia was and always will be the “guarantor of stability” in the Caucasus is now a risky statement that could repel as well as draw regional backing.

Its neighbours are now independent countries whose priority is not to please the Kremlin but turn any crisis to their advantage, or worry about how it might adversely affect them.

Economic interests first

Next door to Georgia in the Caucasus, Azerbaijan’s top concern is to keep the pipeline that runs from Baku through Georgian territory to Turkey free from threat of attack.

But President Ilham Aliyev is also apparently wary of aggravating Russia. He has now publically backed Georgia’s territorial integrity, but steered clear of more vigorous support of Tbilisi.

Uzbekistan and Kazakhstan have donated aid for Ossetian refugees

Landlocked Turkmenistan too, with its immense gas fields on the other side of the Caspian Sea, has a lively interest in making sure the Baku pipeline is not disrupted and Georgia remains a stable reliable partner.

It competes as well as collaborates with Russia as an energy supplier. It does not want one of its main outlets threatened.

And beleaguered Armenia, at the southern tip of the Caucasus, has even more reason to be alarmed. Any prolonged conflict in Georgia would disrupt all its supply routes.

Further west and closer to Europe in the “former Soviet space”, there has been an even more marked shift in governmental responses.

Tiny impoverished Moldova, on the border between Romania and Ukraine, has its own “frozen conflict” unsolved from Soviet days: the Russian-supported and heavily armed enclave of Trans-Dniester.

So this week Moldovan President Vladimir Voronin pointedly turned to the European Union for help in finding a peaceful way out of that stand-off.

Ukrainian ambivalence

In Ukraine, President Viktor Yushchenko from the very start saw Russia’s military intervention in Georgia as an implied threat. Ukraine too is a Nato aspirant, and Russia has frequently warned it that Nato membership is something it will not tolerate.

Yulia Tymoshenko is likely to run in the next election

So President Yushchenko was swift to define himself as the champion of Ukraine’s right to join Nato and defy Russian pressure.

Not only did he fly to Tbilisi to offer moral support, he issued a presidential decree to remind Russia that its Black Sea Fleet in Sevastopol in the Crimea does, after all, use a Ukrainian port.

In future, he demanded, Russia must give 72 hours’ notice before moving its vessels and he once again raised the prospect that Ukraine might not renew its lease for the port when it expires in 2017.

But how Russia’s relations with Ukraine might unwind is not straightforward.

The fear has certainly been expressed in Kiev that a restive pro-Russian population in the Crimea might provide a pretext for another Russian military intervention. Russian nationalists who see the Crimea as historically Russian territory would seize any pretext to realise their ambitions, goes the argument.

What is certainly true is that a clash between Moscow and Kiev over the Crimea would probably cleave Ukraine in half and open up a dangerous conflict with widespread repercussions. But a more likely scenario is less dramatic.

Russia has only to wait for a change in Ukrainian politics. President Yushchenko may be a prominent leader but his long term-durability is not guaranteed. Opinion polls put his popularity at under 10%.

With presidential elections due in 18 months, the Kremlin may well reckon it can look for a more reliable partner in his likely opponent and current Prime Minister, Yulia Tymoshenko, who has been remarkably quiet on the Georgia crisis.

Mixed signals from Minsk

But perhaps the most interesting response has come from Belarus and its President, Alexander Lukashenko, sometimes described as “Europe’s last dictator”.

Belarussian police pounced on anti-Russian protestors during the conflict

Only a few years ago Russia was such a close ally, there was talk of the two countries merging, so one might have expected him to back Russia’s action in the Caucasus.

But Belarus has had a series of bad-tempered rows with Russia over energy supplies and has recently shown more interest in improving Western contacts.

The initial response from Minsk to Russia’s intervention in Georgia was decidedly ambivalent – so much so, that the Russian ambassador there even publicly expressed his displeasure.

President Lukashenko then travelled to Sochi to reassure President Medvedev that Moscow’s military operation had been conducted “calmly, wisely and beautifully”.

But he took steps to clear the way for better relations with the US and Europe.

In the last few days the final three political prisoners in Belarus have been suddenly released – the beneficiaries, it seems, of an unexpected presidential pardon.

“It’s very significant,” said Britain’s Ambassador to Minsk, Nigel Gould Davies. “For the first time in a decade Belarus does not have any political prisoners.”

And watch this space. Whether Belarus is really serious about improving its relations with the West will be tested in September, when it holds parliamentary elections.

Istanbul site ‘hit by grenades’

Several hand grenades have been thrown at a municipal building in Istanbul, according to local reports.

A local mayor told semi-official news agency Anatolia that three grenades had exploded. At least one person was hurt.

Reports say two men fled the scene on a motorbike. The attack took place in Uskudar on the Asian side of the city.

Last month, double bombings blamed on Kurdish separatists killed 17 people in the city. The Kurdistan Workers’ Party (PKK) denied any role in the attacks.

A month ago, three police officers and three gunmen were killed in an attack on the entrance to the US consulate in Istanbul. Turkish police said they were investigating possible links to al-Qaeda.

Political tensions

Police are searching for the two suspects who are thought to have fled on a motorbike after Thursday’s explosions.

A double bombing in Istanbul last month claimed the lives of 17 people

Uskudar mayor Mehmet Cakir told Anatolia that one blast had occurred in a rubbish truck in the car park of the municipal building and two more in a neighbouring cemetery.

NTV Television said the wounded person suffered a minor injury to the leg.

The latest incident comes at a time of increased political tensions in Turkey.

Last week, Turkey’s Constitutional Court narrowly voted not to close down the governing AK Party, accused of undermining the country’s secular system.

Meanwhile, an investigation continues into a shadowy ultra-nationalist group, known as Ergenekon, which is suspected of plotting to overthrow the government.

Dozens of people have been arrested and charged in connection with the inquiry, including two retired high-ranking military generals.

Turkey has seen armed attacks from a variety of groups in recent years.

The most deadly was in November 2003, when 58 people were killed by Islamist militants in suicide bombings outside two synagogues, the British consulate and a British bank in Istanbul.

The Kurdish rebels of the PKK have also been blamed for several attacks, including a car bombing that killed six people in the city of Diyarbakir in January.

Leftist and ultra-nationalist groups have also been accused of violence.