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Markets slump before US Congress bailout vote

Global stock markets tumbled as US Congress was to vote on a multi-billion dollar bailout deal and as the ongoing financial crisis forced the state rescue of two European banks, dealers said.

business Updated: Sep 29, 2008 15:45 IST

Global stock markets tumbled on Monday as US Congress was to vote on a multi-billion dollar bailout deal and as the ongoing financial crisis forced the state rescue of two European banks, dealers said.

US lawmakers agreed over the weekend to a 700-billion-dollar bailout for debt-stricken Wall Street banks and sent the legislation aiming to stem the US financial crisis for Congress to start voting on Monday.

"There's an agreement in place for the 700-billion-dollar bailout but in this market, no one is taking any chances and we must wait until the vote to confirm it has passed," said City Index market strategist Joshua Raymond.

"Then we must see if it ticks all boxes for a recovery, and that means the market understanding how it is going to work fundamentally.

"This may take a little longer for us to gain a realistic picture of the markets' interpretation," added Raymond.

Meanwhile in Europe, Belgian-Dutch banking and insurance group Fortis sealed a multi-national bailout over the weekend, while the British government on Monday announced it would nationalise troubled mortgage lender Bradford & Bingley.

In addition, global central banks pumped extra cash into the financial system as part of continued efforts to keep credit flowing.

Amid all the intervention, London's stock market dived 2.49 percent to 4,962.02 points in morning deals.

Paris shares plunged 2.83 percent to 4,054.44 points and Frankfurt tumbled 2.84 percent to 5,891.42 points.

In Asia, Hong Kong share prices closed down 4.3 percent on Monday, Tokyo fell 1.26 percent, Sydney lost 2.0 percent and Seoul dropped 1.35 percent.

"The (European) government bailouts have served to highlight that the financial turmoil which originated in the US is clearly a global problem," said Lee Hardman, an analyst at The Bank of Tokyo-Mitsubishi UFJ in London.

Sentiment was also hit after German bank Hypo Real Estate was granted a "multi-billion euro" credit line from a consortium of German banks that allowed it to avoid declaring bankruptcy.

Hypo Real Estate shares collapsed by 64.2 percent to 4.84 euros in Frankfurt. German peer Commerzbank tumbled 21.5 percent to 11.315 euros.

Fortis shares dived 18.9 percent in morning trading on the Amsterdam stock exchange. Belgian, Dutch and Luxembourg officials had announced an 11.2 billion euro plan on Sunday to partially nationalise Fortis.

In Paris, French banks Credit Agricole and BNP Paribas saw their share prices dive by 6.84 percent and 6.27 percent, to stand at 13.415 euros and 63.98 euros respectively.

In London, B&B shares were suspended at Friday's closing level of 20 pence.

Royal Bank of Scotland stock shed 13 percent to 181 pence, HBOS dived 8.94 percent to 157.8 pence and Barclays dipped 6.55 percent to 342.5 pence.

Meanwhile, there were still doubts about the proposed US financial rescue package, which needs to be approved by Congress and offers no guarantee of an end to the credit crunch that has ravaged global markets, dealers said.

"In our view, while the 'bailout plan' reduces the risk of a systemic collapse, many downside risks remain -- not least those related to a protracted slowdown in the global economy," said Barclays Capital analyst David Woo.

"In addition ... the financial market turbulence is seriously affecting the European financial system."

Woo added: "The weakness in equities ... suggests the market is pessimistic about the likely effectiveness of the (US) Treasury's plan."

The US deal, announced just hours before Asian markets opened, is designed to mop up toxic debts from struggling banks and prevent further financial chaos that could tip the world's largest economy into recession.

The unprecedented bailout, worth up to 700 billion dollars (479 billion euros), would be the largest government economic intervention since the Great Depression of the 1930s, and aims to shore up an economy in the face of a severe housing slump.

With markets still skittish, the Australian and Japanese central banks pumped more emergency funds into the short-term money markets on Monday.

The European Central Bank announced a special 38-day euro loan to provide eurozone banks with more cash in a bid to balance conditions on extremely tense interbank money markets.

US Treasury Secretary Henry Paulson said the package "gives us the flexibility to unclog our financial markets (and) increase the ability of our financial institutions to deliver the credit that will help create jobs."