Dismal economy sinks oil and U.S. mulls auto bankruptcy

NEW YORK (Reuters) - Oil prices plummeted on Thursday on concerns the global economic downturn will be long and deep, while one of its main casualties, the U.S. auto industry, faced White House talk of bankruptcy as part of a rescue by the government.

People rush past a man begging for money in front of a shop window promoting a Christmas sale on the main shopping street "zeil" in downtown Frankfurt, December 18, 2008. REUTERS/Kai Pfaffenbach (GERMANY)

U.S. crude fell 9 percent to a four-year low, near $36 a barrel -- despite dramatic cuts this week in oil supply by OPEC and in U.S. interest rates, to near zero, by a Federal Reserve aiming to jump-start the economy.

Oil has dropped 25 percent over five trading sessions amid the worst outlook for energy demand in a quarter-century.

The oil drop hurt energy stocks in Europe and the United States and helped push down the broader U.S. market 2 percent.

A month-long production halt about to start Friday at Chrysler LLC, the most fragile of the Big Three U.S. carmakers, added drama to the debate over government loans the industry seeks to avert near-term collapse of that company and General Motors Corp.

President George W. Bush said he was worried about the impact a “disorderly bankruptcy” might have on markets -- signallingthat a managed bankruptcy might be part of an emergency financial lifeline.

Amid the mayhem and a month before he takes office, President-elect Barack Obama told financial markets he would strengthen regulatory agencies and crack down on runaway “greeding and scheming” at the heart of bank failures, fraud and loose mortgage lending.

“We have been asleep at the switch,” Obama told reporters in Chicago as he presented appointees to head the Securities and Exchange Commission and sit on the Federal Reserve board.

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The day served up a litany of dismal economic data from Europe’s big economies and dramatic cost-cutting measures from companies, even the profitable ones betting on a U.S. recession stretching well into 2009.

Package delivery giant FedEx Corp FDX.N, a bellwether of the U.S. economy, announced $800 million (532 million pounds) in cost-cutting to cope with a grim 2009, including pay cuts and a suspension of matching contributions to its retirement plan.

“Our financial performance is increasingly being challenged by some of the worst economic conditions in the company’s 35-year operating history,” Chief Executive Fred Smith said.

But on a more positive note, Citigroup Inc C.N said it boosted its lending after receiving government money under the $700 billion Troubled Assets Relief Program.

The giant financial group has received $45 billion (30 billion pounds) from TARP, a program that critics say banks have used for writedowns and loan losses rather than new loans to get the economy moving.

The latest batch of data on the sickly U.S. labour market showed little sign of improvement last week, and continued weakness in the manufacturing sector held out no hope that unemployed workers would find a place in struggling factories.

In Germany, corporate sentiment deteriorated sharply in December, with manufacturers of export goods suffering acutely, the closely watched Ifo survey showed.

The Ifo research institute said it had to go back to 1982 to find such a weak index level.

“The German economy is in the middle of a severe recession but it is still unclear how large this recession will be,” said ING Financial Markets’ Carsten Brzeski.

British retail sales rose unexpectedly in November, but government borrowing hit a record monthly high, and mortgage lending plunged 51 percent year-on-year.

French Prime Minister Francois Fillon said no European country will avoid contraction in 2009.

The head of the International Monetary Fund predicted a U.S. recovery by early 2010 but said his assessment was “plagued with uncertainty.


With the Bank of Japan expected to cut its interest rate closer to zero on Friday, Bank of England Deputy Governor Charles Bean told the Financial Times that zero rates were also a possibility in Britain.

The UK central bank has already slashed rates by three full points to 2.0 percent since October.

The BoJ is forecast to cut rates from an already minimal 0.3 percent after the dramatic Fed cut Tuesday, but to stop short -- for now -- of reviving a policy of flooding markets with cash.

Stocks settled on those expectations with Japan's Nikkei average .N225 closing 0.6 percent higher.

European stocks ended lower .FTEU3, and U.S. stock market indexes fell on both oil and Standard & Poor's threat to strip General Electric GE.N of its 'AAA' credit rating. .N

The Dow Jones industrial average .DJI tumbled 219.35 points, or 2.49 percent, to 8,604.99 while the Standard & Poor's 500 Index .SPX dropped 2.12 percent to 885.28.

Investors, meanwhile, continued to flock to the safety of U.S. Treasuries, sending the yield on the 30-year note to a record low below 2.53 percent.

The U.S. dollar posted its biggest one-day rise against the yen in more than a month as speculation mounted that the Japanese government may intervene to halt its currency’s advance.

Reporting by Reuters bureaus worldwide; Writing by Mary Milliken; Editing by Gary Hill