NEW YORK (Reuters) - The United States pledged more support for struggling insurer AIG on Monday as international action to halt the financial crisis failed to dent investor sentiment that the economy was in for a long and deep recession.
Initial optimism over the AIG plan and China’s $586 billion stimulus package collapsed in the face of dismal U.S. company news including layoffs, a major bankruptcy filing, the agony of the once-mighty U.S. auto industry and a record $29 billion quarterly loss by mortgage giant Fannie Mae.
The Chinese plan, announced Sunday, gave a temporary boost to markets, but they were dragged back down by Japanese manufacturers reporting their biggest quarterly slump in machinery orders in a decade and Fitch saying the credit ratings of South Korea, South Africa, Russia and Mexico were in jeopardy.
Fitch Ratings also cut Romania’s credit to “junk” status and downgraded Bulgaria, Kazakhstan and Hungary.
“China’s stimulus won’t work instantaneously and we’re already in a global recession,” said Phil Orlando, chief equity market strategist at Federated Investors in New York.
Central bankers meeting in Brazil vowed to remain vigilant while also warning there was no single solution that could be applied across borders. [ID:nG7G8]
U.S. President-elect Barack Obama, who takes office on January 20 and favors spending many billions more in a fiscal stimulus package, visited the White House on Monday to receive a tour from outgoing President George W. Bush and ease the transition of power.
Obama’s Treasury Department will also have at its disposal the $700 billion rescue plan known as the Troubled Asset Relief Program (TARP), passed by the U.S. Congress in the heat of the presidential campaign.
Once billed as a plan to buy toxic debt from financial firms, it has since been modified to allow the U.S. government to take equity stakes in companies and it may also be used to help the distressed U.S. auto industry.
The revised, $150 billion rescue package for American International Group Inc is some $27 billion more than previously extended and includes a $40 billion ownership stake for the U.S. government — an investment that would come from the TARP. [ID:nN10464039]
“We cannot continue to hemorrhage cash in the two areas of securities lending and credit default swaps,” Chief Executive Edward Liddy said on a conference call. “We need to stop that, and we need to stop it now.”
Economists see the U.S. economy headed for a recession that will be deeper and last longer than those of 2001 and 1990-1991 according to the monthly Blue Chip Economic Indicators, a closely watched survey of economists.
“Some of our panelists believe it may (rival) the 1981-1982 downturn. ... Job losses seem destined to remain sizable over coming months as the recession continues to take its toll,” the newsletter said.
China announced a 4 trillion yuan ($586 billion) spending package on Sunday to boost domestic demand in the world’s fourth-largest economy.
However, some analysts warned it might not be as large as advertised.
In any case, it followed more than $4 trillion in government pledges around the world for bank bailouts, credit guarantees and fiscal spending to contain the damage from the worst financial turmoil in 80 years.
Interbank lending seized up more than a year ago, although the money markets have shown signs of recovery in recent weeks.
In a sign the American consumer is not ready to bail out the economy, No. 2 electronics retailer Circuit City Stores Inc filed for bankruptcy protection. [ID:nN10421304]
General Motors stock tumbled more than 20 percent after analysts downgraded the top American carmaker.
Separately, DHL Worldwide Express BV, a unit of Germany’s Deutsche Post, announced it was shutting down its U.S. domestic delivery service and cutting 9,500 jobs.
Fannie Mae said it is losing money so fast it may have to tap government cash to avoid shutting down.
The Dow and the S&P turned negative after an early rally. The blue-chip Dow closed 0.82 percent lower while the broader S&P 500 ended down 1.27 percent. European stocks closed 0.9 percent higher after Tokyo shares gained close to 6 percent.
European banks remained under stress with Spain’s Santander launching a surprise $9.2 billion rights issue as the financially strong bank joined ailing rivals in bolstering their capital.
Reporting by Reuters bureaus around the world; Editing by Steve Orlofsky, Brian Moss, Gary Hill