Markets reel as US bank rescue plan offers little comfort

LONDON - Global stock markets were reeling on Tuesday, extending heavy losses as the latest US bank rescue plan offered little comfort the underlying problems driving the global downturn will be quickly resolved.

By (AFP)

Published: Tue 24 Feb 2009, 6:12 PM

Last updated: Thu 2 Apr 2015, 3:57 AM

Record low business confidence in Germany, Europe's biggest economy, a fall in French consumer spending, a spike in Polish unemployment and more job losses were all part of a relentless litany of bad news.

In Asia, Tokyo slid to near 26-year lows after an overnight rout on Wall Street when a new US plan offered relief to banks but stopped short of the outright nationalisation that some argue is the only option left.

A joint statement on Monday from the US Treasury, Federal Reserve and banking regulators said the plan could lead to bigger government stakes but was based on a "strong presumption" that banks "remain in private hands."

Analysts said this was the first step in a so-called "stress test" announced by the administration of President Barack Obama to determine the health of banks hammered by the US housing meltdown and global credit crisis.

But crucially there were no details on capital injections for individual banks despite reports the government might take over some large lenders, including Citigroup, once the largest of them all, on the brink of insolvency.

"The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," the statement said.

Getting the banks, especially the US banks, lending again is essential to avoid a 1930s style Great Depression but despite hundreds of billions of dollars spent to shore them up, there is little sign of progress.

"We're obviously all hugely worried about the American financial system and about the financial system of some other countries," Canadian Prime Minister Stephen Harper said Monday.

"Frankly, until that problem gets fixed, it's hard for me to see how we're going to turn the corner on this recession that we're in now," he said.

Investors share that view and appear confused over US government direction, with stock markets falling steadily in the past couple of weeks to leave New York back near levels last seen in 1997.

Investors "are selling (shares and the dollar) without being clear whether they should be afraid of banks being nationalised or whether they want it," said Sumitomo Mitsui Banking Corp. chief strategist Daisuke Uno.

Robert Eisenbeis, an economist at Cumberland Advisors, said the Obama administration "has gotten itself trapped" in a debate on nationalisation even as it increases control of the sector.

"Once you have government ownership, it is hard to say that doesn't constitute a form of nationalisation," Eisenbeis said.

"Once the government money is in there, government can start to call the tune on policies, salaries. I think a lot of this debate is semantics."

Meanwhile, signs of the economic damage were evident everywhere.

To go with the slump in German business confidence, European Union factory orders in December plummeted 23.3 percent from a year earlier, pointing to more pressure on manufacturing output.

Standard and Poor's cut its ratings outlook to negative from stable on India, once seen as an emerging market giant that along with China would help the world through the slump, because of an "unsustainable" fiscal position.

Government budgets everywhere are at risk as countries spend billions to bolster their economies even as the downturn cuts tax revenues.

South Africa then announced that its economy shrank 1.8 percent in the fourth quarter of 2008, the first such contraction in 10 years, as the slowing world economy undercut demand for raw materials.

Tokyo lost 1.46 percent on Tuesday but managed to just recover from lows last seen in 1982 while Hong Kong shed 2.9 percent and Sydney fell 0.6 percent.

Chinese shares, which bounced by a third over the past month or so on hopes that China's size and relatively rapid rate of growth would stand it in good stead, plunged 4.56 percent.

In midday European trade, London's FTSE 100 index of leading shares was down 1.23 percent, in Paris the CAC 40 sank 1.27 percent and Frankfurt's DAX 30 was off 1.97 percent.

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