Washington debates bailout

By Patricia Zengerle

WASHINGTON (Reuters) - The U.S. Treasury defended its handling of the financial bailout on Tuesday as American banking and auto woes reverberated around the globe and the International Monetary Fund said it would need extra funding to help countries through the downturn.

Facing tough resistance from the White House and some congressional Republicans to a Democratic proposal to bail out their ailing industry, the leaders of the "Big Three" U.S. carmakers warned the U.S. Senate Banking Committee of dire consequences absent a bailout plan.

"This is about much more than just Detroit. It's about saving the U.S. economy from a catastrophic collapse," General Motors Corp CEO Rick Wagoner said in written testimony.

GM, Ford Motor Co and Chrysler LLC have been hit hard by a collapse in consumer spending triggered by the U.S. housing crash and exacerbated by rising unemployment and months of soaring gasoline prices.

The hearing came a day after Senate Democrats proposed to bail out the ailing industry with $25 billion in government-backed loans, although their bid to use money from the government's $700 billion financial bailout plan has not gained traction.

Earlier on Tuesday, U.S. Treasury Secretary Henry Paulson insisted the bailout fund was not "a panacea for all our economic difficulties" as he locked horns with congressional Democrats demanding part of the money be used to stem home foreclosures.

Pressed about whether bailout funds should be tapped to help automakers, Paulson said any solution for car firms should help them retool to make more energy-efficient vehicles, and that was not what the fund was set up to do.

"The rescue package was not intended to be an economic stimulus or an economic recovery package. It was intended to shore up the foundation of our economy by stabilizing the financial system," he said at a hearing on the crisis.

FAR-REACHING EFFECTS

Earlier, Ford decided to sell two-thirds of its controlling interest in Japan's Mazda Motor Corp. The decision illustrated the alarm gripping the American industry and the impact of U.S. troubles on economies well beyond its frontiers.

Japan's economy minister said recession in the world's second-biggest economy could last longer than feared.

In Britain, already officially in recession, headline inflation dropped to 4.5 percent in October from 5.2 percent the previous month, heightening expectations of a substantial cut in Britain's 3.0 percent interest rate next month.

U.S. producer prices declined by a record 2.8 percent in October as energy prices slumped, showing inflation pressures receding sharply. However, a major measure of core inflation at the farm and factory gate rose more than forecast.

The economic crisis has spread steadily in recent weeks beyond major developed countries, with states from Ukraine to Iceland to Pakistan seeking help from the IMF.

"Next year will be a difficult year. We are in a genuine world crisis. Past crises were regional. This is the first time the crisis is global," IMF Managing Director Dominique Strauss-Kahn told a news conference on a visit to Africa.