Meltdown threatens global economy

George W Bush warns of "lasting damage" and urges congress to pass the already-rejected $700 billion bailout bill.

George W Bush finishes his statement about the economic bailout bill and financial crisis on Sept 30 2008 at the White House.

As US officials regroup for another attempt at a financial rescue package, concerns are growing that Wall Street's meltdown is quickly spreading from the financial system to the real economy, and from America to the rest of the world. Heartened by signs that US legislators are still working on a compromise bailout, global equity markets generally stabilised today. But credit markets, the borrowing and lending that is the lifeblood of economic activity, continued to fear for the worst. Banks went another day lending virtually nothing to one other, extending the longest period that they have outright shunned each other since the 1930s. Instead, they and investors piled into perceived safe havens such as gold, US Treasury bonds and deposits with central banks. At the European Central Bank, lenders deposited a record ?44 billion (Dh236bn) for safe keeping overnight while scrambling to borrow the largest sum of money from the bank's emergency lending facility since 2002. Central banks dumped huge sums of cash into the banking system, led by the US Federal Reserve's US$650bn (Dh2.4 trillion) outpouring on Monday. They hope to keep financial institutions afloat until they gain the confidence to resume lending to each other, and then on to businesses and consumers to keep them investing and spending. Yet problems continued to mount. In the US, Wachovia, a troubled lender, was purchased on its deathbed by Citigroup. Goldman Sachs and Morgan Stanley saw their shares fall sharply again on Monday, despite dramatic efforts in recent days to raise capital and forge alliances to restore confidence in their businesses. The British mortgage lender Bradford & Bingley was partly nationalised. Belgium, Netherlands and Luxembourg partly nationalised the financial group Fortis, and the German government and the country's banks joined forces to extend a last-minute credit line to the property lender Hypo Real Estate. In France, President Nicolas Sarkozy called a pre-dawn meeting with key advisers, met French bankers and promised new measures by the end of the week. "Banks are in trouble in Germany, Belgium and Great Britain," an aide told Agence France-Presse news service. "We feel a bit surrounded." Reverberations from Wall Street spread as far as Iceland, where Glitner, the country's third-largest bank, was nationalised on Monday. Those developments dovetailed with concerns that financial problems could be even more difficult to contain beyond US borders. "The US can fix this," said Khalid Abdulla-Janahi, the chairman of Ithmaar Bank, in an interview at the World Economic Forum's New Champions conference in Tianjin, China. "They have one market, one government, one package. The worry is what happens when it shifts across the Atlantic. Then we'll have different countries, different jurisdictions. How will you have one package?" Markets in the Gulf were closed yesterday for the Eid al Fitr holiday. In Washington, President George W Bush spoke on national television in a short but blunt address, a day after Monday's stock plunge wiped $1.2tn in value from US stocks. "We need sensible legislation that gets our economy going again," he said. "We're in an urgent situation... If we continue on this path, the economic damage will be painful and lasting." His words, along with congressional willingness to revisit the bailout package, helped stave off further steep losses in stock markets. But signs continue to emerge that the turmoil in credit markets, which has been going on for more than a year, is taking a toll on the global economy. International air freight traffic shrank in August, according to figures released by the International Air Transport Association (IATA). Air cargo shipments fell 2.7 per cent while passenger traffic rose by a meagre 1.3 per cent. The cargo shipments, especially, reflect the health of world trade and they have declined for three successive months. "This shows the impact of the financial crisis is broad geographically, and will worsen before it gets better," said Giovanni Bisignani, the director general of the association. Some observers have expressed concern that corporations could begin to fail as they are forced to close their books for the third quarter tomorrow. Global markets could also be tested by the large-scale redemptions requests many hedge funds are expecting. The industry has had one of its worst-ever runs and many operators are expecting some investors who have been stung to pull out their money. That may cause the funds to sell more assets to raise cash. And back in the US, a struggling housing market, linked to many of the financial instruments at the heart of problems in the financial system, continued to erode. A closely watched index showed home prices fell by the sharpest annual rate ever in July. The Standard & Poor's/Case Shiller 20-city housing index fell a record 16.3 per cent compared to the year-earlier period. That was the biggest decline since the 20-city index came into use in 2000. The 10-city index fell 17.5 per cent, the biggest decline in its 21-year history. [e-mail]