27 Sep 2008

Money markets scramble as US crisis deepens

3:45 pm on 27 September 2008

Stalled negotiations over Washington's proposed bailout of the United States financial sector continue to hit global stocks as the crisis keeps money markets under enormous stress.

Along with the biggest bank failure in United States history, the nose diving banking stocks have added to pressure on the US Congress to agree to a $700 billion financial rescue plan to resuscitate credit markets.

Central banks across the world scrambled to meet desperate demand for cash overnight, just a day after Washington Mutual collapsed in the largest-ever United States bank failure.

US federal regulators seized the assets of savings and loan company Washington Mutual, selling them for almost $US2 billion to another bank, JPMorgan Chase & Co.

Meanwhile, the US House of Representatives on Friday approved a $US60.8 billion economic stimulus package that aims to create jobs though increased spending on infrastructure projects.

But chances of the package becoming law appeared slim as the White House said it would veto the bill and a similar measure failed to clear the Senate earlier in the day.

In Europe, Belgian-Dutch financial group Fortis NV denied it had a liquidity problem after its shares tumbled more than 20%.

Banks worldwide hoarded cash and showed a growing reluctance to lend, driving rates that institutions charge each other on loans to a record high in London.

Wachovia Corp, the sixth-largest US bank, saw its stock price tumble 36%.

Gold prices rose as investors sought safety in bullion. Gold jumped 4% and the US dollar fell 1.6% against the yen, the strongest currency performer across the board. Gold is up about 20% since 11 September.

The crisis reverberated in the world's ports as banks ceased lending, leaving some cargo stranded on docks.

Banks inject billions

The world's banks injected tens of billions of dollars worth of fresh liquidity into the global banking system, helping to lower soaring inter-bank borrowing rates.

As investors focused on the prospect of a $US700 billion bailout for Wall Street, the European Central Bank, the Bank of England and Swiss National Bank collectively put up $US74 billion of one-week funds into the markets.

Despite the best efforts of monetary authorities, companies are concerned about lending to one another because of worries about potential exposure to downtrodden real estate assets, banks and other financial services.

Meanwhile, US shares finished the week mainly higher in a volatile session as traders opted for buying ahead of the weekend in anticipation of a deal in Washington on a financial rescue plan.

Bush says agreement will be reached

Despite days of talks collapsing in acrimony, the United States President George w Bush is still expressing optimism that Congress and the White House will come together on the proposal to bail out the country's troubled financial system.

Mr Bush concedes there have been disagreements with aspects of the plan, but stresses that everyone agrees something substantial has to be done and he is continuing to work with congressional leaders.

He says there is a need to move quickly, and that has created challenges because the bailout that is required is so big.

Mr Bush made the statement at the White House on Saturday morning, and said the country's politicians would rise to the challenge.

Senate Majority leader Harry Reid says lawmakers will stay in session as long as it takes to get a deal.