As Contagion Spreads, Moods Abruptly Shift

Congress approves a massive plan to shore up the U.S. financial system, despite a stunning early defeat. The Senate passed the legislation on Wednesday evening, and the House passed the legislation on Friday afternoon.
By Edward Cody and Mary Jordan
Washington Post Foreign Service
Tuesday, September 30, 2008

PARIS, Sept. 29 -- The turmoil that began on Wall Street now spans the globe.

Stock markets around the world cascaded lower Monday, European regulators announced the rescue of four major banks, and U.S. and foreign officials pledged to make hundreds of billions of dollars available to ensure that banks would continue lending to one another.

Yet the contagion continued. U.S. stocks opened weak, then fell off a cliff after the House of Representatives voted against a $700 billion plan intended to restore stability to the nation's wobbly financial system. That sent Brazil's stock market down more than 9 percent, prompting authorities in Sao Paulo to temporarily suspend trading, amid worries of a deep U.S. economic slowdown.

When markets opened Tuesday morning in Asia, the trend continued. Stocks fell by 3 to 6 percent in early trading throughout the region. At midday, Japan's stock market had skidded more than 4 percent.

In the seldom-interrupted cycle of global financial markets, the extraordinary pace and scale of events brought an abrupt end to the confident attitude displayed by European officials as recently as last week, when officials claimed that shareholders and investors there had less to fear than their American counterparts because European banks were not as heavily exposed to the troubled mortgage loans undermining the U.S. system.

That confidence was eroded over the weekend by the emergency bank rescues. By Monday morning, after Asian stock markets had nose-dived, credit markets were seizing up, meaning that the normal flow of trading among banks wasn't taking place. The European Central Bank then announced it was pumping an extra $173 billion into European markets. In Washington, the Federal Reserve said it would make an additional $620 billion available for future lending to nine foreign central banks.

The head of one of those nine, Bank of Japan Governor Masaaki Shirakawa, said Monday that global financial liquidity "has almost dried up."

European banks are strained by the recent collapse of property booms close to home, notably in Britain, Spain, Portugal and Ireland, by exposure to bad U.S. mortgage securities, and by the general drying up of short-term credit. Japan's economy is already suffering from a highly unusual trade deficit, and domestic demand for goods appears to be waning, too, the Tokyo government reported Tuesday. Last month household spending fell 4 percent and factory output dropped 3.5 percent.

The House rejection of the White House's $700 billion rescue plan seemed likely to increase international concern over what might be next.

In Europe, the banking crisis "can hardly spread further -- it is everywhere," said Willem Buiter, a professor at the London School of Economics and former member of the Bank of England's monetary policy committee.

European Central Bank President Jean-Claude Trichet sat down Sunday with several European finance ministers in Brussels to discuss loosening European Union rules on government guarantees for banks in need of quick infusions of capital. Their meeting suggested that European governments feared they would need to intervene again.

French President Nicolas Sarkozy, who said Thursday that French banks appeared able to overcome the threat, summoned the country's top bank executives, his senior financial aides and the governor of the Bank of France for an urgent meeting Tuesday. His finance minister, Christine Lagarde, renewed her promise that "the government will assume its responsibilities" to prevent losses to French savings and investment account holders.

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