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Stocks, dollar drop after bailout collapses

SINGAPORE - U.S. talks to bail out America’s top auto makers with a $14 billion rescue package collapsed, threatening reverberations in the global supply chain and financial markets and prompting investors to flee from risky assets.

The yen surged to a 13-year high against a falling dollar and Asian stock markets tumbled after talks in the U.S. Senate hit a dead end, raising fresh fears for the global economy that already faces its deepest financial crisis in decades.

“It’s going to be a very, very bad Christmas for a lot of people based on what takes place here tonight,” said U.S. Senate Majority Leader Harry Reid.

“I dread looking at Wall Street tomorrow. It’s not going to be a pretty sight.”

As the talks collapsed, countries elsewhere were pushing forward with their latest efforts to stave off a crisis that has pushed the United States, the euro zone and Japan into recession, pushed some banks to the wall and is threatening a sharp rise in global unemployment.

In Asia, Japan was set to unveil a $437 billion stimulus package, the Yomiuri newspaper reported, while South Korea announced a currency swaps deal with China and was to announce a similar deal with Japan to deepen its pool of dollar liquidity.

The U.S. House of Representatives had agreed to the bailout for the auto makers. General Motors Corp and Chrysler LLC had sought billions of dollars in immediate aid to avert a collapse in their businesses, while Ford Motor Co wanted a hefty line of credit.

However, negotiators in the U.S. Senate failed to come to an agreement.

Reid, a Democrat who favours the bailout, said negotiators were not able to get a compromise plan over the finish line, for this year at least.

“It’s over with,” Reid said.

Tokyo’s Nikkei average and stocks elsewhere in Asia were down 5 percent after the bailout package ran out of gas in the U.S. Senate. Major stocks indexes around the region were all in the red.

The dollar dived below 90 per yen to its weakest level against the Japanese currency in 13 years. The yen often gains as a relative safe haven in currency markets in times of risk aversion.

U.S. government debt, another haven for fretful investors, also rose. U.S. crude oil prices, which earlier slipped for the first time in three days, almost doubled their losses after the bailout collapse.

“Everybody is a bit jittery. When you get news like this, there will be flight to safety, which is from emerging Asia to the dollar and yen. Asian equity markets are open so they are being hit,” said Alvin Liew, Southeast Asia economist at Standard Chartered Bank in Singapore.

Empty-handed

Reid had hoped that an agreement could be reached on a recalibrated rescue package for Detroit’s Big Three and that a vote could be taken. But the Republican-brokered talks faltered at the last minute.

General Motors, Chrysler and Ford limped back to Detroit empty-handed despite the late-night talks. The compromise plan would have granted them loans under stricter conditions than those favoured by Democrats and soon-to-be former President George W. Bush’s White House.

The failure of any one of the three would threaten countless jobs and reverberate not only through the global supply chain but in financial markets as well.

Senator Christopher Dodd, a Connecticut Democrat, said the main issue of disagreement was a date to require the Detroit autoworkers’ pay parity with foreign manufacturers.

A procedural vote on the Democrat-sponsored bill was scheduled late on Thursday in Washington but Reid admitted it would fail. “There is too much difference,” he said.

In Tokyo, the Yomiuri newspaper reported that Japanese Prime Minister Taro Aso would announce a $437 billion stimulus package later on Friday for the recession-hit economy. It did not cite any sources.

Details about the Japanese stimulus package reported by Yomiuri were sketchy but not all of the $437 billion—about 10 percent of GDP—was earmarked for spending.

Part of the money would be used to expand the amount of public funds set aside to pre-emptively recapitalise financial institutions to 12 trillion yen ($131 billion) from 2 trillion yen, the paper said.

South Korea’s currency swap deals would come before leaders from South Korea, Japan and China meet on Saturday in Japan, with the global economic crisis sure to top the agenda.

The currency swap deals are meant to help South Korea cope with 2009 growth that the central bank warned on Friday would be the slowest in 11 years.

South Korea has already been dipping into a $30 billion currency swap with the U.S. Federal Reserve and has smaller swap deals with some Southeast Asian central banks.

Its currency reserves fell last month to their lowest level in almost four years as authorities pumped funds into the domestic market.