Investors start the final quarter of 2008 this week in an increasingly dysfunctional global market, after weeks of historic turbulence that have prompted a near seizure in lending between banks.
While Washington's $700-billion bailout package is crucial in tackling the worst financial crisis since the Great Depression, doubts remain as to how it could immediately thaw the frozen money and credit market.
This week's data highlight is the U.S. employment report for September but the indicator is unlikely to fully capture the massive shock to the labor market, broader economy and consumer confidence of the events of the past two weeks.
Interbank money markets are experiencing historically high tensions after the collapse of Lehman Brothers, Washington Mutual and the firesale of Merrill Lynch and UK bank HBOS, while a global ban on short selling has caused trading volumes in major stock exchanges to dwindle.
The liquidity crisis is spreading to the Arab Gulf, other emerging markets and Scandinavia, and the U.S. commercial paper market, a vital source of funding for many companies' daily operations, has shrunk to its smallest in almost two years.
All that has backed a stampede into safe-haven U.S. government debt that has sent short-term yields to near zero as prices rocketed.
"It's the most dysfunctional market I can remember in my career of 20 years," said Chris Iggo, chief investment officer at AXA Investment Managers.
"It is the complete questioning of the very fundamentals of how the financial system works. The real key to everything we do is a matter of trust and there is evaporation of trust."
"That's why banks are not lending to each other and people are worried about the creditworthiness of debt and there's a lack of belief in the ability of equities to deliver the earnings that analysts are forecasting."
After more than a week of negotiations, U.S. lawmakers on Sunday were set to sign off on a deal to create a $700 billion government fund to buy bad debt from ailing banks.
Britain might claim another victim to the 13-month-old credit crisis this week. The BBC reported on Sunday the country will nationalize troubled mortgage firm Bradford & Bingley (BB.L) after it took Northern Rock into public ownership in February.
PRESSURE FOR GLOBAL ACTION
On Friday, the cost of borrowing dollars for three months in the interbank market stood at 3.76188 percent, a full two percentage points above expected official U.S. interest rates -- a record premium.
Numerous liquidity interventions by central banks -- so far the only coordinated action -- have failed to eliminate money market tensions stemming from a global shortage of dollars.
Pressure is growing for policymakers to do more to contain the fast-spreading financial crisis -- delivering an ensemble cut in interest rates for example.
"The clear signal from the market is that these liquidity operations are not working. The money is not getting where it needs to go," said Nick Parsons, head of market strategy at nabCapital.
"So, if changing the quantity of money has not worked, then it's time to change its price."
The European Central Bank, which meets on Thursday to decide on interest rates, is unlikely to lower the cost of borrowing until December because it remains worried about persistent inflation pressures.
According to interest rate futures, investors are betting on a 1-5 chance of a half-point interest rate cut from the Federal Reserve by late October.
"Credit is rapidly becoming either completely unavailable or punitively expensive ... The countdown to a dramatically bad economic outcome is therefore running at very high speed," said Tim Bond, head of asset allocation at Barclays Capital.
"Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank capital contraction and deep recession within a matter of weeks."
In these uncertain times, options for investors to invest their capital are diminishing rapidly as stocks and commodities fall, while government bonds are already expensive with some U.S. yields close to zero.
"Investors are trying to do everything they can to safeguard capital. The implication is the continued deleveraging of the financial system and the continued consolidation of financial institutions," Axa's Iggo said.
"There is no credit available to finance consumption and investment. Globally there is a major economic slowdown that's going to last for a considerable amount of time."
Tuesday's release of Reuters September global asset allocation polls will give a useful pointer on how money managers are shifting their assets in surveys conducted after the collapse of Lehman Brothers.
Even emerging markets -- the star performers of the past few years -- are suffering from a departure of foreign capital as investors flee higher-risk assets.
Morgan Stanley analysts say the bank industry panic in the developed world could cause capital inflows into emerging markets to fall by a quarter to $550 billion in 2009, increasing the risk of a global recession and even a currency crisis.
Emerging market stocks, measured by MSCI (.MSCIEF), are down 34 percent this year, after five straight years of double digit gains. Their developed market counterpart (.MIWO00000PUS) is down 22 percent since January.
In Ukraine, a mix of political and economic uncertainty has led to a sharp fall in the local currency, depleting currency reserves and threatening a full-blown currency crisis.
"Not only will the emerging market economies experience a material slowdown, but the world's capital flows to emerging markets will also likely be significantly reduced, undermining emerging market currencies," Stephen Jen, Morgan Stanley's chief currency economist, said in a note to clients.
(Editing by Paul Bolding)
Iraq has signed preliminary deals worth billions of dollars with General Electric Co and Siemens for equipment to almost double electricity generation capacity, an energy official said on Saturday.
The deals with GE, Siemens and a third company would be worth a total of $7 billion to $8 billion, Iraq's Electricity Minister Karim Waheed told Reuters.
Years of war, sanctions and neglect have battered Iraq's power grid and the country suffers chronic power shortages. The capital Baghdad receives only a few hours of electricity a day. The deals would mark a big step in the country's reconstruction, Waheed said.
"These deals will help us to end the electricity supply problem by 2012," Waheed said on a private visit to the United Arab Emirates.
Iraq signed a memorandum of understanding (MOU) earlier this month for U.S. giant General Electric to supply turbines to generate 6,800 megawatts of power, Waheed said.
He declined to say how much Iraq would pay GE for the equipment, but said each megawatt would cost between $700,000 and $800,000. That would give a value of between $4.8 billion and $5.4 billion.
The country has signed a second MOU with Germany's Siemens to supply equipment to generate another 2,000 MW, he added. That deal would be worth between $1.4 billion and $1.6 billion.
Baghdad was negotiating with a third company for another 1,000 MW, he said, declining to give further details.
The three deals would enable Iraq to add around 10,000 MW to installed capacity by around 11,000 MW. Damage to the power stations, lack of maintenance and drought mean Iraq's actual power production is well under capacity at around 5,500 MW.
Demand stands at around 11,000 MW, Waheed said.
Iraq plans to approach engineering, procurement and construction (EPC) firms to build the plants once the deals are signed, he added.
While big international companies were still reluctant to send people to work in Iraq, improvements in security had improved Baghdad's chances of attracting companies to undertake the work, he said.
Iraqi oil officials will meet Russia's Technoprom Export on October 12 to review a $124 million deal to repair 400 MW of power generation capacity in the southern city of Basra.
The World Bank will fund the deal, he added.
The deal was one of several frozen after the U.S.-led invasion of Iraq in March 2003. Iraq is also negotiating with Russia's Power Machines to revive another old deal to build two plants with 160 MW of capacity each in Iraq's north, he added.
Iraq signed a deal with GE for three power plants worth $480 million in June.
(Editing by Janet Lawrence)
Congressional leaders locked themselves behind closed doors on Saturday with the aim of nailing down a deal on a $700 billion bank bailout and halting a downward spiral in the worst financial crisis since the Great Depression.
Leading lawmakers, who huddled with U.S. Treasury Secretary Henry Paulson, said they hoped to reach an agreement to create a massive government fund to buy up distressed debt from financial institutions staggered by failed mortgages.
House of Representatives Speaker Nancy Pelosi said she hoped a deal would be clinched on Saturday so Congress could act as early as Sunday with the goal of preventing a repeat of last week's white-knuckle ride in the financial markets.
But House Republicans, who had thrown talks into disarray on Thursday, said they still wanted to see Wall Street pay more of the cost and were less concerned about reaching a deal before Monday's opening bell.
"We're not moving on any kind of artificial timeline. We're moving toward the very best solution in the shortest period of time we can get to the very best solution," said Rep. Roy Blunt of Missouri, the chief negotiator for House Republicans.
The urgent background to the debate remained fear-wracked financial markets after big banks teetered, collapsed or refused to lend money to each other. Central banks have been forced to pump liquidity into the markets to try to prevent them from seizing up and bringing the economy to a halt.
Regulators seized savings and loan Washington Mutual Inc on Thursday in the biggest bank failure in U.S. history, selling its assets to JPMorgan Chase & Co. In a reflection of the latest Wall Street shakeout, Washington Mutual filed for bankruptcy in a Delaware court on Saturday.
Meanwhile, published reports said Wachovia Corp, the sixth-largest U.S. bank, began merger talks with potential partners after a 27-percent drop in its shares on Friday.
The rush to forge a bailout package also overshadowed the presidential campaign and Friday's debate between Democrat Barack Obama and Republican John McCain.
Obama accused McCain on Saturday of playing politics with the financial crisis, while his Republican rival tried to show leadership by returning to Washington, where an aide said he was working the phones behind the scenes.
FEAR OF CONTAGION
While Congress tried to find a way to stop the bleeding in America, investors fretted about contagion into Europe, where Belgian-Dutch financial group Fortis NV fired its interim chief executive after liquidity concerns pushed its shares to a 14-year low.
In London, regulators and politicians were in talks over the future of troubled lender Bradford & Bingley, raising the prospect that a second British bank could be nationalized.
IMF Managing Director Dominique Strauss-Kahn warned that the world faced a serious, long-lasting slowdown because of the crisis.
At the U.S. Capitol, House Republicans were pressing for a form of bad loan insurance that banks would pay for, as an alternative to putting taxpayers on the hook for buying up toxic assets.
Sen. Charles Schumer, a New York Democrat, said Democrats were willing to allow that insurance provision as an option in the bailout but did not see how it could solve the crisis since it would further strain balance sheets.
Democrats said they were considering a proposal to institute a fee on financial firms if taxpayers lost money from the government's asset purchases.
Among other still-open issues for congressional dealmakers was how much of the bad loan package would be available from the start. "We are dealing with that right now," said Illinois Rep. Rahm Emanuel, a member of the Democratic leadership.
Democrats have pushed for the money to be made available in tranches in order to create a legislative check on the program.
Paulson, by contrast, had wanted to have the full $700 billion at his disposal from the start, arguing any package had to be big enough to instill confidence in shaky markets.
As the majority in Congress, Democrats could have sought to force a bill through the House and Senate and onto the president's desk for signature into law, but leaders demanded a deal that would satisfy both parties.
"If there is the belief that there is a bipartisan agreement, it takes us a long way in terms of market reaction," said Sen. Richard Durbin, an Illinois Democrat.
With the entire House and one-third of the Senate facing re-election on November 4, some lawmakers said they were facing a grass-roots backlash to a plan seen as providing a safety net for powerful banks.
In New York, dozens of noisy protesters marched from Times Square hoisting a banner that read "No Money for Wall Street, No Money for War, Bailout the Workers and the Poor."
"The feeling is of outrage against this bailout because the average person has not been bailed out of anything," said activist Sara Flounders, 60.
President George W. Bush acknowledged the public anger over the bailout package in his weekly radio address. "If it were possible to let every irresponsible firm on Wall Street fail without affecting you and your family, I would do it. But that is not possible," Bush said.
(Writing by Kevin Krolicki; Additional reporting by Donna Smith, Deborah Charles and David Lawder; Editing by Vicki Allen)