European Banks Under Pressure 

European banks have been hit hard by the fallout from a crisis which began in the United States when the housing market collapsed and bad mortgage debts multiplied.

France's President Nicolas Sarkozy seaks with German Chancellor Angela Merkel (L) during a news conference following a summit to discuss the international financial crisis at the Elysee Palace October 4, 2008. [Agencies]

In Berlin, the German government and banks agreed to a new rescue package for Hypo Real Estate.

Banks and insurers had withdrawn their support for a government-led 35 billion euro ($48.50 billion) rescue deal after problems came to light at the Munich-based lender.

Under the revised deal, commercial banks and insurers would provide an extra 15 billion euros ($20.8 billion) in liquidity for HRE in addition to the initial pledge of 35 billion euros.

Germany's finance ministry said the deal would stabilize HRE, a key player in commercial property and infrastructure lending and government financing.

BNP Paribas, meanwhile, struck a deal with the governments of Belgium and Luxembourg to take control of the key remaining assets of troubled financial group Fortis.

BNP Paribas will buy 75 percent of the Belgian banking arm of Fortis as part of a deal in which Belgium will receive new shares in the French bank.

In Milan, Italy's second-biggest bank, UniCredit, convened a special board meeting to ask shareholders for an additional 3 billion euros in capital to protect it from the crisis in international markets.

In Iceland, officials, including the central bank, were at work on a financial stability plan to address a crisis that has sent the country's currency spiraling lower and is seen as threatening its financial sector.

The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets and is seen as pushing industrialized countries toward recession.

The resulting pinch has shut down corporate access to credit as earnings fall. As companies cut back, analysts are bracing for tens of thousands of more job cuts and pressure on consumer spending, which represents about two thirds of the US economy.

JPMorgan and Goldman Sachs both predict that the United States entered a recession over the past week with growth expected to contract for two consecutive quarters.

Fed fund futures have fully priced in a 50-basis point rate cut by the Federal Reserve this month as expectations have built that the European Central Bank could cut rates for the first time in five years.

With Asian markets set to open for the first time since passage of the US bailout deal, analysts said the risk for sharply slower US growth would loom increasingly large.

Goldman Sachs economist Tetsufumi Yamakawa said in a note issued on Sunday that he would cut his forecast of 1.9 percent growth for Japan for 2009 in light of the expectation that the US economy had slipped into recession.