Sarkozy sees threat, BOJ says tumult overdone

NEW YORK/LONDON (Reuters) - France's Nicolas Sarkozy warned on Thursday that the U.S. home loan crisis was a threat to world growth, while a Bank of Japan policy-maker said the recent market turmoil has been overdone.

The French president sounded his warning as financial markets perceived a sliver of doubt had been cast on the prospect of a U.S. interest rate cut next month.

"Financial turbulence is threatening world growth," Sarkozy told a conference run by France's Medef employers' organization, adding that banks had a key role to play in supporting growth.

"For banks, playing along does not mean lending more to speculators than to companies and households. It does not mean tightening credit to the economy to compensate for the excessive risks they have taken on the financial markets," he said.

Analysts at Lehman Brothers cut their earnings estimates for Bear Stearns Cos Inc (NYSE: - ), Goldman Sachs Group Inc (NYSE: - ), Merrill Lynch & Co Inc (NYSE: - ), and Morgan Stanley (NYSE: - ), citing turmoil in mortgage-related and credit markets.

Most politicians and policy-makers until now have said the global economy was weathering relatively unscathed the fallout from the high-risk U.S. subprime lending crisis.

In a letter released on Wednesday, U.S. Federal Reserve Chairman Ben Bernanke said the Fed was "prepared to act as needed" to ensure credit turmoil did not harm the economy, firming expectations for a rate cut at its September 18 meeting.

All eyes will be on Bernanke's speech on "Housing and Monetary Policy" on Friday.

The credit market is experiencing an unprecedented loss of confidence due to the lack of transparency over where exposures lie rather than underlying credit quality problems, Moody's Investors Service (NYSE: - ) President Brian Clarkson told Reuters in an interview on Thursday.

The Wall Street Journal's Fed commentator, Greg Ip, without explicitly suggesting a rate cut was in doubt, said Thursday that the central bank was in no rush to lower rates because it wanted to disabuse investors of the view that it was there to bail them out.

"They hope that taking time to weigh the economy's need for rate cuts will help discourage investors from thinking Fed officials are overly concerned with falling asset prices," he said.

SPRING GROWTH, FALL SLOWDOWN

The U.S. economy grew at an annual rate of 4 percent in the second quarter, as strong business investment led the fastest pace of expansion since early last year, the government reported on Thursday.

But while the pace was the fastest since the start of 2006 and eclipsed the first quarter's anemic 0.6 percent rate, analysts said growth has peaked and will slow sharply in coming quarters.

"It was nice to see that strong growth in the spring," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania. "But that is history and the credit problems ... imply that the third quarter could be extremely slow."

Bank of Japan board member Atsushi Mizuno, the lone advocate of a BOJ rate rise at the last two policy meetings, said a September 18 cut in U.S. rates would change the basis of discussion in Japan but not necessarily rule out a BOJ rate rise the next day.

Calming the panic in financial markets was the most immediate task, Mizuno said in a speech to business leaders.

"To my eyes, there is market confusion that went beyond rational repricing (of risk)," he said.

The U.S. commercial paper market shrank sharply for a third week, according to Federal Reserve data showing credit markets remain tight despite central bank actions to revive lending.