US Fed unveils new $800bn rescue

The Fed’s aim is to prevent a deep economic slump

The Federal Reserve is to pump $800bn (£526.8bn) into the markets in another bid to deal with the financial crisis.

The US central bank said it would use $600bn to buy-up mortgage-backed securities to help encourage lending.

Separately the Fed also unveiled a $200bn plan to help unfreeze the consumer credit market.

As the credit crisis has deepened, banks and other financial institutions have been reluctant to lend, deepening the economic slowdown.

Under this new rescue plan – which is in addition to the already-announced $700bn bank bail-out – the Fed is to buy up to $100bn in debt from the troubled mortgage giants Fannie Mae and Freddie Mac.

The central bank said it would also buy another $500bn in mortgage-backed securities – pools of mortgages that are bundled together and sold to investors.

New bail-out

The $600bn effort on mortgages came as the Fed also unveiled a separate program to help unfreeze the consumer debt market.

The central bank said it would lend up to $200bn to the holders of securities backed by various types of consumer loans, such as credit cards and student loans.

The Fed said that the $600 billion effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability.

It said the purchases of the mortgages and mortgage-backed securities would take place over a number of months.

The severe financial crisis that is rocking global markets at the moment began more than a year ago with rising defaults on subprime mortgages, loans provided to borrowers with weak credit histories.

‘Unblocking credit’

Recently, Treasury secretary Henry Paulson had indicated that the government was working on this new program, which will be supported by $20bn of credit protection provided by the existing $700bn bank bail-out fund.

The news of this latest massive financial rescue plan was generally welcomed.

“They are getting to the heart of the problem, it’s clean, it’s quick, it’s direct. It’s a good way to bring down mortgage rates, because at the end of the day they have to stabilise the housing market,” said Todd Abraham of Federated Investors, Pittsburgh.

Robert Macintosh, chief economist with Eaton Vance, Boston, said: “If they can pull it off it’ll make some people happy, but I don’t know how effective it’ll actually be.”

Scott Brown, chief economist at Raymond James Associates, Florida, said: “Here is the Fed taking a bunch of debt out of the market, which doesn’t hurt. I think it should it should help unblock the credit markets.”

Asia markets follow US share drop

Concerns are increasing over the scale of the slowdown

Asian markets have plummeted after the Dow Jones share index in New York fell to its lowest level in five years, amid fears of a protracted global recession.

Japan’s Nikkei index ended 6.8% down and Hong Kong’s main index fell 5.5%.

Data showing Japan’s exports to Asia dropped in October for the first time since 2002 added to fears over the scale of the economic downturn.

On Wednesday, Wall Street shares fell 5% after the US central bank slashed its economic growth forecasts for 2009.

‘No positives’

Japan and other Asian nations are heavily reliant on exports.

Sales to other Asia nations have helped to limit the impact for Japanese exporting firms suffering from lower demand from the US and Europe.

But exports to Asia fell 4% last month from a year earlier, showing the extent of the global slowdown.

Several East Asian countries – including Japan, Singapore and Hong Kong – are already in recession and the thought that the US may be about to join them has been enough to send shares tumbling across the region.

Share prices in Tokyo and elsewhere slumped

Bad news from the US worries Japanese firms like Toyota and Nintendo which usually depend on American consumers to make a lot of their profit, our correspondent adds.

“We’ve gone past the poor sentiment stage,” Miles Remington, head of Asian sales trading at BNP Paribas Securities in Hong Kong, told the Associated Press news agency.

“People are looking for any kind of positive and there are just no positives out there. Everyone seems to be united in the depressed global outlook. Whether it’s commodities or equities, everything seems to be on a downturn.”

US slowdown

On Wednesday, the US Federal Reserve said the country’s gross domestic product – the value of all goods and services – could be flat or grow only marginally this year, and might shrink in 2009.

It said positive economic growth was only likely to return in 2010 and predicted further interest rate cuts might be necessary.

Month-on-month US consumer prices fell by 1% in October – the biggest drop in 60 years – which has reinforced fears of rapid slowdown.

Car problems

Carmakers were among the biggest fallers as the Dow Jones average closed down 427 points at 7,997 on Wednesday – dropping below the 8,000-level for the first time since 2003.

GM shares were down 15% at a 66-year low, while rival Ford slumped to a 26-year low.

Prospects for an industry bail-out remain uncertain and politicians have been arguing over a compromise deal.

Chief executives from General Motors, Ford and Chrysler say the firms could collapse unless they receive aid fast – which could lead to millions of job losses across the US.

But the automakers have faced fierce questions on Capitol Hill about their request for a $25bn (£16.6bn) bail-out deal.

Investors are concerned about how a possible bankruptcy among US carmakers could further hurt an already fragile economy.

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US markets wary over rescue deal

The markets remain nervous

US shares have fallen sharply with investors cautious over whether the House of Representatives will back the revised bank rescue plan.

The House is due to discuss the scheme later, with a vote expected on Friday. The bill successfully passed through the US Senate on Wednesday.

On Wall Street, the Dow Jones index was down 263 points or 2.4% at 10,571, a slide dragging European shares lower.

The falls came as France said it would host a summit on the financial crisis.

The UK’s FTSE 100 closed was down 1.8% to 4,870.3 points while Germany’s Dax index shed 2.5% and France’s Cac 40 lost 2.3%.

Sentiment was further hit by glum economic data – showing that the number of people filing for new unemployment benefit claims rose to a seven-year high, while factory orders had seen a steeper-than-expected drop in August.

European talks

The office of French President Nicolas Sarkozy said the special meeting on Saturday would discuss a co-ordinated response to the financial turmoil amongst European members of the G8 ahead of a meeting of world finance leaders in Washington next week.

UK Prime Minister Gordon Brown is due to attend, together with German Chancellor Angela Merkel, Italian Prime Minister Silvio Berlusconi and European Central Bank President Jean-Claude Trichet.

Investors are still concerned about the efficiency of this rescue plan and how it can help the global economy Aric Au, Phillip Securities

But with just two days to go before the talks start, EU members are deeply divided, correspondent said.

France and Holland favor a European response to help banks hit by the credit crisis while Germany and Luxembourg believe a joint rescue plan is not necessary.

European leaders have denied speculation that they wanted to establish a unified 300bn euro ($418.4bn; £236bn) banking rescue deal along the same lines as the US plan.

The rescue idea was said to be being proposed by France, but Mr Sarkozy insisted that there were no such plans.

“I deny both the amount and the principle [of such a plan],” he said.

‘Essential’

In the US, a number of changes had to be made to the $700bn (£380bn) bail-out plan in order to help win approval in the Senate.

These include raising the government’s guarantee on savings from $100,000 to $250,000, tax breaks to help small businesses, expansion of child tax credit, and help for victims of recent hurricanes.

President George W Bush said that the package was “essential to the financial security of every American”.

However, economists said doubts remained about how effective the package would be.

“Investors are still concerned about the efficiency of this rescue plan and how it can help the global economy,” said Aric Au of Phillip Securities in Hong Kong.

McCain and Obama

US presidential hopefuls John McCain and Barack Obama, who both returned from the campaign trail for last night’s Senate debate, voted in favor of the rescue plan.

Senate majority leader Harry Reid, a Democrat, said he was happy with the result and praised both presidential candidates for voting.

“I think it shows that when we work together we can accomplish good things,” he said.

Mitch McConnell, leader of Republican senators, was also in jubilant mood.

“This was a measure that was much needed, to unfreeze the credit markets and get America’s economy working again,” he said.

Output issues loom as Opec meets

Iran is leading the calls from those nations demanding an output cut

The United Arab Emirates'(UAE) delegation to Tuesday’s Opec oil meeting says the cartel will continue to keep the world “well supplied”.

Minister of Energy Mohammed Bin Dhaen Al-Hamli also said crude stockpiles in major oil consuming nations were within recent average levels.

It came as Iran led calls for Opec to cut output.

Analysts say the cartel may scale back production as prices have fallen from $147 a barrel in July to about $107.

Light, sweet crude rose 53 cents to $106.67 during trading on the New York Mercantile Exchange on Monday.

‘Market requirements’

The price hit a five-month low just above $105 on Friday, under pressure from economic weakness and lower fuel consumption.

However the Kuwaiti oil minister, Mohammad Olaim, backed the views of the UEA’s delegate Al-Hamli.

“We don’t think there is a requirement to decrease production,” he said before leaving for the meeting in Vienna.

“If the market requires anything to do, we will.”

Al-Hamli added in his remarks that decisions on production levels are based on whether the market is well supplied.

He also said the recent fall in prices showed that the earlier steep rise in prices from $100 a barrel at the turn of the year was “too high, too fast”.

But Iranian Oil Minister Gholam Hossein Nozari said on Monday that there was “oversupply” as he arrived for the 13-nation conference.

Increased output

On Sunday, Libya also called for a reduction in Opec output. Opec is currently thought to be producing about a million barrels per day (bpd) more than its official ceiling of 29.67 million bpd.

In May and June Saudi Arabia agreed to increase production by 500,000 bpd to help calm markets.

Saudi Arabian Oil Minister Ali al-Nuaimi has yet to state an opinion on output and prices ahead of the meeting.

Opec produces about 40% of world crude. In July, the exporters’ group said world demand for oil will grow by 50% between now and 2030 as people in developing countries drive more cars.

Global economy woes shake markets

Japanese shares felt the force of the economic uncertainty

Fears about a global economic slowdown, heightened by worsening US job figures, have continued to undermine stock markets around the world.

London’s FTSE 100 index lost 2.3% – taking its weekly decline to 7% – its biggest since July 2002.

Markets in Paris and Frankfurt fell by 2.5% as economy concerns spread.

On Wall Street the Dow Jones index clawed back early losses to edge higher despite figures showing the US economy shed 84,000 jobs last month.

But the benchmark US index still had its worst week since May.

Earlier, Japan’s main share index fell nearly 3% while markets in Hong Kong, China, Australia and India all slid 2%.

‘Ugly’ data

The US labor market figures – which showed the unemployment rate rising to 6.1% – were a further jolt to investors who have had to swallow a slew of poor economic data in recent days.

Economists had been expecting 75,000 jobs to be lost while the government also revised upwards.

“This was an ugly number that pretty much confirms that our economy continues to trend downward,” said Jack Ablin, chief investment officer of Harris Private Bank.

“This just knocks the legs out of any hope of seeing much economic improvement right now.”

‘Uncertainty’

Amid the uncertainty, few investors are willing to buy Masayuki Otani, Securities Japan

The FTSE 100 closed down 2.3% at 5,240.70 points. The last time it lost so much value in a week was more than six years ago in the wake of financial scandals such as Enron and WorldCom.

Markets in Paris and Frankfurt continued their recent downward trend, both the Cac-40 index and the Dax-30 dropping about 2.5%.

The Dow Jones index, which lost 3% on Thursday, rose 32.73 points, or 0.3% to 11,220.96, but still ended down 2.8% on the week.

“Given the fact we were down so much yesterday we’re seeing a bit of a reflex rally with investors wanting to take advantages of some of the bargains,” said Bucky Hellwig, senior vice president at Morgan Asset Management.

The Nasdaq index slipped 3.16 points, or 0.1% to 2,255.88, ending the week 4.7% lower.

Earlier Japan’s benchmark Nikkei index fell 361.54 points to 12,196.12 amid a widespread sell-off of shares in Asia.

The Hang Seng index fell more than 3% in Hong Kong while markets also fell sharply in China, Australia and India.

“Amid the uncertainty, few investors are willing to buy,” said Masayuki, Otani, chief market analyst at Securities Japan.

“Several bad things happened at once,” he added, explaining the fall.

Gloom

Worries about inflation have prevented central banks in Europe from cutting interest rates to help forestall a slowdown.

But analysts believe this could change soon with economic forecasts across Europe looking increasingly gloomy.

The European Central Bank cut its 2009 growth forecast from 1.5% to 1.2% on Thursday while the UK economy stalled in the second quarter.

In a separate development, the Russian rouble fell against the dollar a day after Russia’s central bank intervened to support the currency amid concerns about a flight of foreign capital after the conflict with Georgia.

The central bank sold up to $4bn in reserves, the Financial Times reported, after the rouble slipped to its lowest level since February 2007.