Disagreement over the bailout of the US system could put the fragile global economy into a downwards spiral.
Global markets teetering on edge
Global financial markets are perched at the edge of a cliff as US lawmakers and the White House wrangle over a bailout package that could bring some stability to the financial system if adopted, or send markets plunging when they open tomorrow if disagreements seem likely to scuttle the plan.
Negotiations over adoption of the rescue package unveiled more than a week ago by the US President George W Bush and his Treasury secretary have stretched beyond the self-imposed deadline of Friday. The potential cost, up to US$700 billion (Dh2.57 trillion), woke many US residents up to the burden they may have to shoulder to nurse the battered financial system to health, and sparked a revolt among a group of politicians from Mr Bush's own party that stalled efforts to pass the plan late last week.
The stakes are high, and not only for the US. The global financial system is under the most stress since the stock market crash of 1929 and subsequent global depression. As Washington politicians traded barbs in public and locked horns behind closed doors, global credit markets seized up nearly completely towards the end of the week as another major financial institution, the 119-year-old Washington Mutual, became the largest bank failure in the country's history on Friday.
In an old-style bank run, depositors pulled $16.7bn from the bank in 10 days amid reports that it was struggling. JP Morgan Chase, which scooped up the investment bank Bear Stearns as it neared collapse earlier this year, swept in to purchase Washington Mutual's remaining deposits from the US government. Meanwhile, another large-scale lender, Wachovia bank, began searching for a buyer to help stem its deteriorating fortunes.
The repercussions of the US financial system congealing for much longer could spread far beyond US borders. Already, stocks in emerging markets have plunged and credit has dried up as US and European investors and financial firms claw back resources in an attempt to survive the market turmoil. That has already raised the cost of obtaining funds for UAE firms and investors, and sparked an emergency injection of cash from the central bank into local institutions. Continuing palpitations in the credit markets could also seriously harm the fragile global economy.
Without access to credit, even healthy companies could begin to fail, setting off a downwards spiral in the economy. That is why Mr Bush, along with the Federal Reserve chairman Ben Bernanke and Treasury secretary Henry Paulson, spent much of the week warning of the dire economic fallout if the plan is not passed. "If money isn't loosened up, this sucker could go down," Mr Bush reportedly said in closed-door meetings, attempting to underscore the severity of the potential crisis.
Central banks around the world poured record sums into their own banking systems, attempting to assure that their institutions have the funds to continue operating until stability returns and they can resume lending to each other. The Fed even took the unprecedented step of arranging huge swaps of foreign currency for dollars with overseas central banks, so they could keep their banks topped up with the dollars they need to continue operating in an environment where even some of the most routine borrowing has become virtually impossible.
The administration rescue plan aims to arm the Treasury with money to purchase an array of financial securities that have had values deeply impaired on the books of financial institutions. Those securities, which are largely based on or concocted from mortgages and other real estate loans, have fallen sharply in value as the US property market plummeted in the past year. With those losses on their books, banks are increasingly reluctant to lend to each other, or to businesses or consumers. Nor have they wanted to buy or sell many of the securities off each other, since no one is sure how little they will ultimately be worth and most financial institutions can ill afford additional losses.