- The Washington Times - Monday, September 29, 2008

UPDATED:

LONDON (AP) – World stock markets fell Monday amid a flurry of government bank rescues in Europe and investor skepticism about the effectiveness of a tentative deal in Washington on a US$700 billion bailout to stabilize the financial system.

Analysts said the flurry of developments around the world is confirming fears that the global financial contagion is likely to spread further before any recovery.

“There’s an increasing realization that the cleanup and the mending of all that’s gone wrong is going to take an extended period to work through, and we’re going to see an extended recovery period,” said Jamie Spiteri, senior dealer at Shaw Stockbroking in Sydney.

The London Stock Exchange FTSE 100 was down 3.2 percent at 4,924.66, while Germany’s DAX dropped 2.9 percent to 5,884.17 and France’s CAC 40 fell 2.9 percent to 4,039.07.

In Dublin, the Irish Stock Exchange plummeted 8 percent to a 12-year low at 3,485 points.

In Asia, Tokyo’s Nikkei 225 index closed down 1.3 percent at 11,743.61, and Hong Kong’s Hang Seng Index shed 2.1 percent to 18,286.90.

The markets were responding in part to news that Dutch-Belgian banking giant Fortis NV was partially nationalized with a 11.2 billion euros (US$16.4 billion) rescue from the governments of Belgium, the Netherlands and Luxembourg, after investor confidence in the bank disappeared last week.

“They’re worried that another fire is starting in Europe,” said Castor Pang, an analyst at Sun Hung Kai Financial in Hong Kong, referring to the Fortis news.

In other activity across Europe, the British government nationalized mortgage lender Bradford & Bingley, taking over the bank’s 50 billion pound (US$91 billion) mortgage and loan books. In a similar move, the Icelandic government bought a 75 percent stake in Glitnir, the country’s third largest bank, for 600 million euros (US$878 million) to ensure broader market stability after it suffered liquidity issues.

In Germany, the country’s second biggest commercial property lender, Hypo Real Estate Holding AG, said it had secured a multibillion euro line of credit from several banks.

The banking turmoil across Europe comes ahead of a vote by U.S. lawmakers on a US$700 billion public bailout of the ailing financial industry. After days of intense talks, the White House and Congressional leaders agreed Sunday to the bailout after lawmakers insisted on sharing spending controls with the administration of President George W. Bush.

“The fact the funds won’t be released in one lot but instead a series of tranches is certainly detracting from its appeal and this, combined with the very visible scars of the credit squeeze, will again weigh on sentiment,” said Matt Buckland, a dealer at CMC Markets.

The biggest U.S. bailout in history, which goes to the House for a vote Monday and to the Senate later in the week, would give the administration broad power to use taxpayers’ money to purchase billions of home mortgage-related assets held by cash-starved financial firms.

But even if the plan helps stabilize credit markets, the outlook for the U.S. economy remains grim, with unemployment at a five-year high of 6.1 percent and expected to climb higher. That’s likely going to weaken demand for exports from Asia and Europe.

Furthermore, there are plenty of banks still in trouble, and it may take time before the bailout plan helps them.

Takahiko Murai, equities general manager at Nozomi Securities in Tokyo, said investors are questioning the effectiveness and details of the plan, including the government’s ultimate purchasing price of the bad assets.

“If it passes as expected, the focus will begin to shift to the real economy,” Murai said.

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