Overview: Markets are in turmoil as the fallout from the financial crisis goes global and hits Euroland hard. Things went from bad to worse yesterday evening, when the House of Representatives rejected the USD 700bn bailout. The compromise bill had been hammered out by high level members of Congress over the weekend. While a bill is likely to be passed in some form, the rejection increases the risk that the final bill will be a watered-down version with a more limited healing effect on the financial system. In our view, developments in recent weeks have already caused damage to the real economy, as access to funding has been cut off.
The spill-over to Europe comes via a number of channels. The direct spill-over from US markets and rising global risk aversion is clear. Global growth prospects decline every day the crisis rages on, and confidence in banks around the globe is crashing. Distrust of the banking sector in Europe was already surging on the back of bailouts of Dexia, Hype Real Estate, Fortis, Glitnir and Bradford & Bingley, and just this morning Ireland rescued a number of banks – see more below.
