BGFS Associates

The financial markets will have to wait until later this week for further news on the US bailout of financial institutions after the House of Representatives voted against the USD700 billion rescue plan for the financial industry announced by US politicians over the weekend.

It is anticipated that the US Senate will try to salvage the plan perhaps as early as tomorrow. Some changes are expected to the legislation to pacify Republicans who are pushing for a mandatory insurance programme. They may also push for the Securities and Exchange Commission to suspend mark-to-market accounting and require banking regulators to assess the real value of troubled assets.

Even as a potential solution to the crisis is being sought in the US the credit crunch has claimed several more casualties, both in the US and Europe. Bradford and Bingley, the UK’s biggest lender to landlords, has become the second bank after Northern Rock to be nationalised by the British Government. Spain’s largest bank, Banco Santander, will pay USD1.1 billion for the failed bank’s branches and deposit base while the Government takes over the bank’s mortgage and loan books. The fourth largest bank in the US, Wachovia Corp, came under increasing pressure after its shares plunged 47 percent last week and has been forced to accept an offer by Citigroup to buy its banking operations. In Europe, the Dutch, Belgian and Luxembourg governments have given a USD16.4 billion lifeline to the Dutch-Belgian bank Fortis. Meanwhile, there has been a USD9.2 billion state bailout by the Belgian and French governments of Dexia.

Money market rates may climb after the bailout of Fortis and Dexia together with nationalisation of Bradford and Bingley deepened concerns that more financial institutions may collapse, prompting banks to retain cash. Rising money market rates would suggest that central bank attempts to breathe life back into frozen money markets haven’t yielded the degree of success that they would like.

Property prices in Spain have fallen by 26.3% in the year to July and mortgage lending fell 33.2% to USD14.9 billion (10.2 billion euro). The property market has been the main driver of economic growth in Spain over the last decade, but analysts say house prices are still up to 30% overvalued.

The euro and pound have weakened against the dollar after reduced investor confidence in the region’s financial institutions while the dollar has been boosted by news of the US bailout plan. The pound has slid to USD1.8036, the biggest intraday decline since 1993, and the euro fallen to USD1.4362.

Commodities have fallen, led by oil, copper and lead, fuelled by concerns that the bailout of US banks will not be enough to avert an economic slowdown. Brent crude has fallen to USD99.51 a barrel for November delivery.

US fuel demand averaged 19.5 million barrels a day during the past four weeks, the lowest since October 2003. New home sales in the US fell in August to a 17-year low and orders for durable goods dropped more than forecast, US Government reports showed last week.