Published October 1, 2008
Hope flickers as US seeks to revive bailout
Interbank markets severely strained, but stocks recover on hopes US rescue plan may be saved
By CONRAD TAN

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(SINGAPORE) Stocks worldwide plunged yesterday and then clawed their way back after US lawmakers stunned investors by rejecting a sweeping plan to save the financial sector.

Plans to salvage the massive rescue package aimed at removing the rot from banks and other financial institutions there are already underway.
Last night, Keith Hennessey, director of the National Economic Council which advises the US president on economic policy, said the government is considering changes to the proposals that were rebuffed by lawmakers on Monday, according to Bloomberg. President George Bush himself warned of 'painful and lasting' economic damage to the country if the rescue plan is delayed further.
The idea is to make minor amendments and pass the bill, whose failure wiped more than US$1 trillion from financial markets.
'We don't intend to leave here without the job being done,' said Christopher Dodd, who chairs the high-level banking committee in the US Senate, one of the two lawmaking bodies in the US Congress. He said US senators may deal with the bill as early as today.
Members of the House of Representatives, the lower house of Congress, who defeated the bailout package by 228 votes to 205, are also expected to do a rethink. 'The Dow dropping 777 points is a pretty powerful force to find another 12 votes,' said Chris Lehane, a political consultant for the Democratic Party.
US lawmakers were expected to reconvene only tomorrow after a two-day holiday but efforts are now afoot to push this forward.
Even if the plan is approved, 'we should expect a longer, deeper recession' and further consolidation of the banking sector in the US, said Gerard Lyons, chief economist at Standard Chartered Bank, in a report yesterday. 'Across Europe we will see a deteriorating economic situation and further financial fallout.'
If the rescue plan fails, it 'could accelerate the downward spiral in global financial markets, as markets are dragged into a new vicious cycle of losses and accelerated deleveraging', said Citigroup analyst Kit Wei Zheng in a separate report.
If so, Singapore would likely suffer a more prolonged and severe slump in exports than expected, as well as damage to domestic demand and the local property sector, he added.
Reflecting the uncertainty, Asian markets swung between despair and hope. Major share indices plummeted at the start of trading with the Dow Jones Industrial Average falling 7 per cent on Monday. But most stock benchmarks in the region recovered later in the day, as the price of futures contracts traded on major US equity indices rose on hopes that the bailout plan may still be saved.
Stocks in Europe also opened lower, but reversed losses to trade higher. By midday in London, the FTSE-100 index was up 0.2 per cent.
Investors around the world had earlier believed that the proposals, which include a plan for the US government to buy up to US$700 billion worth of troubled assets from banks and other financial institutions, would be approved after a weekend of frenzied talks between leaders from both major political parties.
Multiple bank failures across Europe on Monday added to the shock of the plan's defeat by a narrow margin, sending shares in the US into free-fall, while indices tracking stock market volatility there soared to record highs.
'We hit a policy brick wall - and confidence across the financial sector collapsed,' said Mr Lyons. 'The big worry is that the lack of trust now being seen in the banking market spreads and we see contagion into other markets.'
The Straits Times Index ended just 0.1 per cent down after falling 5.1 per cent earlier, while Hong Kong's Hang Seng Index actually finished 0.8 per cent higher after sliding 6 per cent in the morning. In Japan, where trading ended before markets in Europe opened, the Nikkei-225 index sank 4.1 per cent.
'Despite the serious setback, it remains our view that Congress will eventually vote to approve the bailout package,' said UBS analysts in a report.
Interbank lending was once again under extreme stress, even as central banks worldwide continued to flood the banking system with liquidity in a desperate attempt to unblock credit channels and bring down short-term borrowing costs.
Here, the Singapore interbank offered rate or Sibor for overnight US dollar loans more than doubled to 6.25 per cent from 2.67 per cent on Monday - the biggest one-day jump on record. Interest rates for US dollar loans between banks of longer maturities also rose, but less sharply, while rates for Singapore dollar interbank loans eased from earlier highs.
Banks in Hong Kong, Australia and Japan were also charging each other unusually high rates for funds or hoarding cash, prompting regulators to take drastic measures to get banks to resume lending to each other.
In a statement last night, the Monetary Authority of Singapore said it had intervened to ease recent upward pressure on Singapore dollar interbank rates and is ready to inject additional liquidity if needed. 'Financial institutions in Singapore are functioning normally,' it added.
Indonesia, Taiwan and South Korea announced restrictions on short-selling stocks - betting that share prices will fall - while Hong Kong regulators warned that they would act against abusive short-sellers.
In a statement just past noon yesterday, the Singapore Exchange said trading here remained orderly.