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US bailout agreed but bank turmoil hits Europe

business Updated: Sep 29, 2008 15:06 IST
AFP
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US lawmakers agreed a 700 billion dollar bank bailout but the financial hurricane hit European banks full on Monday forcing nationalisations, rescues and a new stocks slump.

After US lawmakers stitched together a revised agreement on the biggest state intervention since the Great Depression of the 1930s, Britain had to nationalise Bradford & Bingley bank, governments intervened to prop up Belgian-Dutch group Fortis and other European banks got sucked into the storm.

European and Asian shares were badly hit.

The US House of Representatives was to vote on Monday on the plan negotiated through the weekend by rival Democratic and Republican leaders with the White House. But the package was not certain to be passed.

President George W. Bush said the rescue "sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system."

But some conservative Republicans and liberal Democrats steadfastly opposed the plan, which includes the immediate release of 250 billion dollars to enable the government to buy up troubled assets.

"We now have a deal that promises to bring near-term stability to our financial turmoil, but at what price?" Republican Congressman Michael Pence, a critic of the bailout, asked in a letter to colleagues.

And White House hopefuls Republican John McCain and his Democratic rival Barack Obama offered only cautious backing.

"The party is over," said House Speaker Nancy Pelosi. "The era of golden parachutes for high-flying Wall Street operators is over. No longer will the US taxpayer bail out the recklessness of Wall Street."

But any relief internationally came too late for Fortis, one of the biggest banks in northern Europe, which was rescued by Benelux governments for 11.2 billion euros (16 billion dollars) at the weekend. Fortis shares rallied by 14.5 per cent in initial trading after crashing last week.

The storm dealt other blows though:

-- Bradford & Bingley was rescued with a part takeover by Spanish Santander bank and 612 pounds (773 million euros, 1.1 million dollars) by the British government.

-- German banks extended a life-saving multi-billion-euro credit line to Hypo Real Estate (HRE), and small Danish bank Bonusbanken was rescued by Vestjysk bank.

-- Belgian-French banking group Dexia denied that it had a liquidity problem as it saw a third of its stock market value wiped out in morning trading in Brussels.

European shares were badly hit by the uncertainty over the US plan and the bad news.

Stocks in London dived by 2.51 per cent, Frankfurt shares fell 3.16 and Paris was down 2.87 per cent after Tokyo fell 1.26 per cent and Hong Kong lost 4.3 per cent.

"Despite the US bail out plan now being committed to paper, there's hardly a jubilant mood expected as the new trading week gets underway," said CMC Markets dealer Matt Buckland in London.

"The fact the funds won't be released in one lot but instead a series of tranches is certainly detracting from its appeal.

"This, combined with the very visible scars of the credit squeeze will again weigh in sentiment," he added, in reference to the B&B and Fortis rescues.

Barclays Capital analyst David Woo 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.

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

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

Motomi Hiratsuka, a trader at BNP Paribas, said: "We know that we are most likely to avoid a meltdown in the US financial sector, but what matters now is negative news from new regions."

The European central Bank announced a special 38-day loan to provide eurozone banks with yet more cash to ease strains on the interbank maker described by one analyst last week as "apocalyptical."

The Bank of Japan injected 1.9 trillion yen (17.8 billion dollars) into the Tokyo money market on Monday.

Interbank money markets are the heartbeat of the banking system and have a huge bearing on sentiment in wider economies.

The dollar firmed slightly in Asia to 106.28 yen from 105.95 on Friday. The euro was at 1.4457 dollars from 1.4613.

The greenback "should receive a short-term boost", NAB Capital strategist John Kyriakopoulos said. "Ultimately, the extent to which the bailout package eases bank funding pressures and reduces the risk of a global recession is key" for currencies trading against the dollar, he added.

But the oil price fell in Singapore, by 1.80 dollars to 105.09 dollars.