Japan, US pledge vigilance as banks gloomy

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LONDON, Aug 21 (Reuters): Finance chiefs of the world's two biggest economies pledged Tuesday to keep a close watch on jittery markets, while banks at the sharp end of a global financial storm said they faced serious trouble.
The Chief Executive of Germany's WestLB Bank, Alexander Stuhlmann, said turmoil in the US subprime mortgage market was making it difficult for German banks to get credit lines from their foreign partners.
Stuhlmann told reporters that German banks were in a "not uncritical situation" overall. WestLB has said it has over 1.2 billion euros in overall exposure to the US subprime sector.
His assessment followed an announcement from Capital One Financial Corp that it will cut 1,900 jobs and shut down a wholesale mortgage unit it acquired less than a year ago, as it struggles with the US housing downturn.
Japanese Finance Minister Koji Omi said there were no plans for an emergency meeting of the Group of Seven (G7) industrialised nations following sharp gyrations in global markets.
But Omi told a news conference he had spoken by telephone with US Treasury Secretary Henry Paulson and they had agreed to keep a close eye on markets and stay in close contact.
"I could tell he has been making various efforts," Omi said of Paulson, though he did not give specific details. "We agreed that we will watch markets developments carefully for a while."
German Finance Minister Peer Steinbrueck insisted that the wider economy was sustaining little damage, an assertion consistently put forward by policymakers so far.
"I have no reason to doubt that we can effectively manage the effects of the US mortgage crisis in Europe," Steinbrueck said, adding that expert opinion suggested the home loan crisis would not feed through to the real economy.
But investors remained ultra-cautious, fearing there may be more problems that have yet to come to light, stemming from a meltdown in the US subprime sector, which could slow the world economy.
"There is still sense of caution in the air," said Irvin Seah, an economist at DBS Bank in Singapore. "If there is more bad news, what we saw last week is probably going to repeat itself. Most people think it will take another two months before things calm down."
US policymakers will hold centre stage Tuesday-Paulson, Federal Reserve Chairman Ben Bernanke and Senate Banking Committee Chairman Chris Dodd are due to meet later to discuss conditions in financial markets.
The closed-door meeting is to take place at 10am EDT and Dodd, a Democrat from Connecticut, is expected to hold a news conference afterwards.
Speculation is feverish that the Federal Reserve may cut the federal funds rate, its key policy rate, from 5.25 per cent at its September 18 meeting or even earlier.