World markets plunge as US auto bailout fails
World stock markets plunged yesterday as the US Senate's rejection of a $14 billion deal to rescue Detroit's ailing automakers stoked concerns that the recession in the world's largest economy will be even longer and deeper than projected.
The FTSE 100 of leading British shares was down 127.87 points, or 2.9 percent, at 4,260.82, while Germany's DAX fell 185.22 points, or 3.9 percent, to 4,581.98. The CAC-40 in France fell 130.48 points, or 4.0 percent, to 3,175.65.
Earlier, Asian markets tumbled, with Japan's Nikkei 225 stock average down 484.68 points, or 5.6 percent, to 8,235.87. Hong Kong's Hang Seng index slid 5.5 percent to 14,758.39.
US stock index futures pointed to a big sell-off later on Wall Street. The Dow Jones industrial average was projected to drop 259 points, or 3.0 percent, to 8,311, while the broader Standard & Poor's 500 index was forecast to fall 32.90 points, or 3.8 percent, to 841.60.
Investors were rattled after the bailout for Detroit's struggling Big Three automakers failed in the US Senate. The collapse came after bipartisan talks on the auto rescue broke down over Republican demands that the United Auto Workers union agree to steep wage cuts by 2009 to bring their pay into line with US plants of Japanese carmakers.
The bankruptcy of any of the big American automakers would deal another blow to the world's largest economy, already in recession.
"For anyone looking for a quiet end to the year, forget about it," said Mitul Kotecha, an analyst at Calyon Credit Agricole.
Hopes for the US auto industry now appear to rest with President George W. Bush agreeing to tap the $700 billion Wall Street bailout fund, or TARP, to aid the carmakers. General Motors Corp. and Chrysler LLC have said they could be weeks from collapse. Ford Motor Co. says it does not need federal help now, but its survival is far from certain.
"This will likely keep markets on edge over the coming weeks...unless it is evident that TARP funds will be used," said Kotecha.
Their efforts in Congress squashed, US automakers are depending upon a reluctant White House to quickly provide a multibillion lifeline to help them avoid imminent collapse.
General Motors Corp. and Chrysler LLC, which have said they could run out of cash within weeks, have few options left after the dramatic defeat in the Senate of a $14 billion bailout for the domestic auto industry.
Its demise late Thursday prompted immediate calls from lawmakers in both parties for the Bush administration to tap into the $700 billion Wall Street bailout to rescue the beleaguered auto industry. The bill failed after talks broke down over the refusal of the United Auto Workers union to meet Republican demands for aggressive wage reductions.
The Senate rejected the bailout 52-35 on a procedural vote well short of the 60 required after the talks fell apart.
"I dread looking at Wall Street," said Senate Majority Leader Harry Reid in anticipation of Friday's stock market reaction. "It's not going to be a pleasant sight."
Stock markets in Asia and Europe dropped sharply on Friday after getting word of the bailout's failure.
The Bush administration has repeatedly said the Wall Street bailout fund should not be used for emergency aid to the automakers because it was designed to restore stability to the financial sector. Following the vote, the White House said it was studying its options.
"Plan B is the president," said Sen. Carl Levin, D-Michigan. House Speaker Nancy Pelosi said action by President George W. Bush was the "only viable option."
General Motors and Chrysler are in the most immediate danger while Ford Motor Co. has said it does not need federal help now, but could face collateral damage if one of its domestic rivals fell. With the economy in recession, the auto industry has struggled under the weight of lackluster sales and choked credit markets.
Detroit's carmakers employ nearly a quarter-million workers, and more than 730,000 others produce materials and parts for cars. If one of the automakers declared bankruptcy, some estimate as many as 3 million US jobs could be lost next year.
It's not just stock markets suffering in the wake of the failure of the Senate to pass the rescue deal. The dollar slumped overnight too, particularly against the yen.
The dollar fell to a low of 88.16 yen, its lowest level since Aug. 2, 1995 before it recovered to trade above 90 yen.
That heaps more bad news on major Japanese exporters like Toyota and Sony already reeling from waning global consumer demand whose overseas income is eroded by an appreciating yen.
Toyota Motor Co. dived 10.1 percent, Nissan Motor Co. lost 11.5 percent and Sony Corp. fell 6 percent. South Korea's Hyundai Motor Co. shed 9.3 percent and Kia Motors Corp. was off 9.1 percent.
Mainland China's stock market fell as investors were discouraged by the lack of any major new initiatives to spur the economy following a top-level economic conference earlier in the week. The benchmark Shanghai Composite Index dropped 3.8 percent to 1,954.21.
Figures this week show that China's economy is feeling the pinch of the global slowdown. For the first time in seven years, exports fell in November.
Investors also grappled with grim US economic and corporate news. New unemployment benefit applications in the week ending Dec. 6 rose to a seasonally adjusted 573,000 from an upwardly revised figure of 515,000 in the previous week. And Bank of America Corp. announced it expects to cut 30,000 to 35,000 jobs over the next three years.
Markets had rallied after President-elect Barack Obama last weekend proposed a massive stimulus package for the US economy once he takes office in late January, pledging the largest public works program since the creation of the US interstate highway network a half-century ago.
"This has been a typical bear market rally. It's been based on very high expectations of Obama's fiscal stimulus plan," said Arjuna Mahendran, head of Asian investment strategy at HSBC Private Bank in Singapore."It's been based on expectations and nothing else."
Elsewhere, oil prices retreated to below $46 a barrel Friday in Asia after a strong rally overnight, but traders said expectations of a sharp production cut by the OPEC cartel would support the market. Light, sweet crude for January delivery fell $1.27 to $46.71 a barrel in electronic trading on the New York Mercantile Exchange.