30 Sep 2008

World markets plunge as US bailout plan rejected

10:31 pm on 30 September 2008

World stocks fell to near three-year lows on Tuesday and investors moved into less risky assets as disappointment over the rejection of a US bank rescue package swept from Wall Street to the Asia-Pacific and Europe.

The falls followed deep losses on Wall Street on Monday after US Congress failed to agree on a $US700 billion plan to ease trouble in the financial industry.

The bailout was proposed by the Bush administration on 20 September, amid warnings that urgent action was needed to prevent economic disaster.

The Dow Jones industrial average lost 778 points, or 6.98%, its largest point decline in history on Monday, while the benchmark S&P 500 had its worst day since the 1987 crisis with an 8.8% drop.

Markets in Asia and the Pacific were also down. New Zealand's benchmark index fell as much as 4.6% on Tuesday, before losing 98 points, or 3.1%, to close at 3090.

In Australia, the bourse slumped to its lowest level in almost three years as investors fled the market, but recovered to close 4.3% lower. Japan's Nikkei share average closed down 4.1% at a three-year low, while the MSCI index of Asia-Pacific stocks outside Japan fell 3.1%.

Russia's stock exchanges suspended trading on Tuesday after the benchmark index lost more than 7% on Monday.

Even before the vote by the US Congress, European markets plummeted on Monday on fears the crisis was spreading. Britain's FTSE-100 and FTSEurofirst 300 index of leading European shares were both down 5% at the close, but rallied in early trade on Tuesday.

Global money markets were frozen even as central banks poured hundreds of billions of dollars into the financial system to persuade financial firms to stop hoarding cash.

"There's a monster amount of fear out there. This is global contagion. It's no longer just the United States," said Joe Saluzzi, co-manager of trading at Themis Trading in New Jersey.

Vote fails

On Monday, the House of Representatives voted 228 to 205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks.

Republicans, in particular, balked at spending so much taxpayer money just before the American elections on 4 November.

US President George W Bush was set to meet with economic advisers on Tuesday to consider the administration's next move.

"We need a plan that works," said US Treasury Secretary Henry Paulson. "We need it as soon as soon as possible, and we're just committed to working with congressional leaders to get it done."

Investors rushed to assets considered a safe haven. Government bond prices and gold jumped, and oil fell below $US99 per barrel on the view that world demand will contract as the financial crisis puts the brakes on economic activity.

"What should have been a day of hope turned into a day of desperation," said Marco Annunziato, chief economist for UniCredit in London. "We are facing a systemic crisis of confidence in the global financial system that is pushing us increasingly close to a complete meltdown."

European Union Trade Commissioner Peter Mandelson said lawmakers in the US had "taken leave of their senses" by rejecting the bailout plan.

Mr Mandelson said the EU's executive commission would propose measures to reinforce cooperation among regulators, bankers and governments and to clarify the role of credit rating agencies. However, he said a broader international response to the global financial crisis was needed.

Bailout prospects uncertain

In Washington, the failure of the bailout bill - after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan - brought new uncertainty about the response of the US government to the worst financial crisis since the Great Depression.

Republican House members voted against the rescue package by a more than 2-to-1 margin. A majority of Democrats voted in favor.

Both parties blamed each other for the failure of the closely watched bill after hours of closed-door negotiations intended to add provisions to protect taxpayers and head off criticism that Washington was riding to the rescue of bankers many Americans blame for triggering the housing crisis.

The Senate returns on Wednesday and the House on Thursday after a break for the Jewish New Year holiday of Rosh Hashanah. No laws can be passed in their absence but their staffs could work on a revised plan.

Banks propped up

The world's central banks, led by the US Federal Reserve, announced a $US330 billion expansion of currency swap arrangements, which allows them to increase the amount of money they can provide in their home markets, effectively throwing more money at the crisis.

US regional lender Wachovia became the latest big bank to succumb to the crisis, agreeing to sell most of its assets to Citigroup Inc in a deal brokered by regulators. It was one of three US financial deals struck as the crisis deepened.

Earlier, the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalise Belgian-Dutch group Fortis NV, and German lender Hypo Real Estate Holding AG secured a credit line from the German government.

British mortgage lender Bradford & Bingley was brought under the government's wing, shares of French bank Dexia tumbled on a report that it might need emergency capital, and bank rescue deals also emerged in Iceland, Russia and Denmark.

The Wachovia deal is the latest in a series of events that has transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

The changes include the government takeover of mortgage finance companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings, the failure of giant savings and loan Washington Mutual, and Bank of America Corp's purchase of Merrill Lynch & Co.