A Week of Bailouts and Ballyhoo – But What’s Next?
by Heather Chapman (New York City)
The passage of the $700 billion bailout plan last week by Congress and the President was supposed to be the first step toward fixing the U.S. economy. But, instead, not only is the U.S. economy worsening, but the European and Asian economies are faltering as well. While steps are being taken worldwide to bolster the economies, it may now be a matter of “too little, too late”.
The dominos started to fall over the weekend, when the governments of Benelux were forced to nationalize Fortis Bank operations. The German government also announced that it would be guaranteeing all private savings accounts in an effort to reassure investors who were worried after announcements that recent bailout efforts for Hypo Real Estate—a large German lender—and Fortis Bank were not enough and that additional bailouts would be needed. At almost the same, the Belgium government helped to arrange for BNP Paribas—a French Bank—to take over what was left of Fortis Bank. Since then, the Italian bank Unicredit announced plans to raise as much as $9 billion in capital to stave off its collapse. Also, crediting the almost unnoticed move by Congress to guarantee $25 billion in loans for U.S. auto manufactures, European auto manufactures are now asking the European Commission for similar aid.
Early morning trading on Monday saw the Financial Times Stock Exchange (FTSE) 100 index in London down 6.04 percent, the Deutscher Aktien Index (DAX) in Frankfurt down 5.8 percent, and the Cotation Assistée en Continu 40 (CAC) down 6.2 percent. Russia’s two main stock exchanges suspended trading until Friday after a massive sell-off began when they opened, and in Tokyo, the Nikkei 225 index fell 3.4 percent.
After trading began in the U.S., the Federal Reserve Bank announced that it would be redoubling one of its emergency lending programs, the Term Auction Facility, raising it from $300 billion to $600 billion, while also lending upwards of an additional $300 billion to banks so they can meet their end-of-year needs. However, to pay for this, the Federal Reserve now has to print more money. To keep the newly issued money from causing havoc with the bank’s overnight interest rate, the Federal Reserve announced that it would be paying interest—at 1.25 percent—on the reserves that the banks held as deposits at the Fed.
Despite these announcements by the Federal Reserve and assurances from President Bush, who said that it would “take a while to restore confidence to the financial system…We don’t want to rush into this situation and have the program not be effective,” nothing seems to be soothing investors. On Monday, the Dow Jones Industrial Average fell 800 points, before recovering to close down 369.88 points. It’s the first time in four years that the Dow Jones has closed below the 10,000-point mark.
In an additional effort, the Federal Reserve announced on Tuesday that it plans to begin to buying large amounts of unsecured short-term debt from companies in an effort to stimulate the credit markets. In a statement, the Federal Reserve said, “This facility should encourage investors to once again engage in term lending in the commercial paper market. An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households.”
Wednesday saw central banks around the world join together to cut interest rates, but this intervention has had little positive impact so far. The Federal Reserve, the Bank of England (BOE), the European Central Bank (ECB), the central banks of Canada, Sweden, Switzerland, and the United Arab Emirates all cut their main lending rates half a percentage point. Officials at the Federal Reserve are saying that this is the first time in history that the Fed has ever coordinated an interest rate reduction with other central banks, although it has previously joined in with other countries to intervene in currency markets in an effort to stabilize foreign exchange rates. The British government also announced its intention to invest billions of pounds into the country’s leading banks, part of a plan that will leave the British government with more influence of the financial sector there.
In Asia, the stock markets had already closed. In Tokyo, the Nikkei 225 experienced its worst single-day loss in nearly twenty years, dropping 9.4 percent, nearly a tenth of its value. In Hong Kong, the Hang Seng index fell 8.2 percent and in Indonesia, authorities shut down the stock market after it had fallen 10.4 percent. What’s happening in the financial sector is beginning to affect the political one in Japan as well, as Prime Minister Taro Aso has promised that he will postpone national elections and instead focus his energies on the economic crisis.
The Dow Jones spent Wednesday fluctuating; dropping 200 points at the opening before moving up 200 points after the announcement from the central banks. Continuing to fluctuate throughout the day across a 400-point range, the Dow Jones ended the day at 9,246.24, dropping almost 200 points in the last twenty minutes of trading. The Standard & Poor’s 500 also ended up down almost 2%, closing at 984.17.
No matter how you slice it, things seem to be going from bad to worse. Failing banks and plummeting markets are one thing but once strong, now-failing national economies -that is a scary prospect. Yet that seems more of a possibility than ever before. Case in point: Iceland, which is presently teetering on the brink of becoming the first “national bankruptcy” as a result of the worldwide economic crisis. The Icelandic Krona has fallen to almost half of its previous value and Iceland’s banks are also falling under the weight of their debts. The government had planned to nationalize Glintir, the country’s third-largest bank, but had to abandon those plans and instead has placed it into receivership and has pegged the krona to the euro in an attempt to stabilize it. Should the worst happen and Iceland’s financial system collapse completely, it’s feared that the repercussions would be felt worldwide as Icelandic banks and companies are heavily invested across the Continent. Currently, Iceland is negotiating with Russia for a $5.4 billion loan to support its floundering economy.
It is anyone’s guess how things will ultimately shake out although many still hold out hope that the intended impact of the U.S. bailout -along with all of the interventions, investments, and loans -will finally bear fruit and stop this current economic crisis from turning into what is feared most – a worldwide depression.
