While US officials regrouped for another attempt at a financial rescue package, concerns are growing that Wall Street's meltdown is quickly spreading from the financial system to the real economy and from America to the rest of the world. Heartened by signs US legislators are still working on a compromise bailout, global equity markets generally stabilized yesterday. But credit markets, the borrowing and lending that is the lifeblood of economic activity, continued to fear for the worst.
Banks went another day lending virtually nothing to each other -- extending the longest period they have outright shunned each other since the 1930s. Instead, they and investors piled into perceived safe havens, such as gold, US Treasury bonds and deposits with central banks. At the European Central Bank (ECB), lenders deposited a record 44 billion Euros for safe keeping overnight, while scrambling to borrow the most money from the bank's emergency lending facility since 2002.
Central banks dumped huge sums of cash into the banking system, led by the US Federal Reserve's $650 billion outpouring on Monday. They hope to keep financial institutions afloat until they gain the confidence to again lend to each other, and then on to businesses and consumers to keep them investing and spending. Yet problems continued to mount. In the US, Wachovia Corp., a troubled lender, was purchased on its death bed by Citigroup. Goldman Sachs and Morgan Stanley saw their shares fall sharply again on Monday, despite dramatic efforts in recent days to raise capital and forge alliances to reinstill confidence in their businesses. British mortgage lender Bradford & Bingley was partly nationalised. Belgium, Netherlands and Luxembourg partly nationalised financial group Fortis and the German government and the country's banks teamed up to extend a last-minute credit line to property lender Hypo Real Estate. In France, Nicholas Sarkozy called a pre-dawn meeting with key advisors, met with French bankers and promised new measures by the end of the week. "Banks are in trouble in Germany, Belgium and Great Britain. We feel a bit surrounded," an aide told the AFP. Reverberations from Wall Street spread as far as Iceland, where Glitner, the country's third-largest bank, was nationalized on Monday.
Those developments dovetailed with concerns financial problems could be even more difficult to contain beyond US borders. "The US can fix this. They have one market, one government, one package. The worry is what happens when it shifts across the Atlantic. Then we'll have different countries, different jurisdictions. How will you have one package?" said Khalid Abdulla-Janahi, chairman of Ithmaar Bank, in an interview at the World Economic Forum's New Champions conference in Tianjin, China.