GLOBAL financial markets plunged into freefall last night after the $700bn plan to keep the faltering American banking system afloat was dramatically defeated by the US Congress.
The Government and market experts reacted with dismay to the defeat of the US rescue package, following the worst single-day performance in the 25-year history of the Dublin ISEQ index.
“This decision will inevitably lead to a more difficult trading environment across the globe and is bound to have an impact on Irish markets,” a government spokesman told the Irish Independent.
Markets here are bracing themselves for another day of volatility this morning after the ISEQ index of shares plummeted by 13pc.
In the US, Democratic leaders vowed to try and put another rescue package together, although a timeframe for this has yet to be established.
The US House of Representative rejected the contentious bailout bill for Wall Street by a majority of 228 to 205.
Banking stocks had already led a sharp decline across all European markets yesterday as investors baulked at a slew of government bailouts across the sector over the weekend.
Irish shares fared worst among 18 western European markets yesterday. Across major exchanges, the FTSE 100 sank 5.3pc, while France’s CAC 40 lost 5pc and the DAX, in Frankfurt, slid 4.2pc. Shares in Allied Irish Banks tumbled 16.7pc, Bank of Ireland slid 20.2pc, Irish Life & Permanent sank 39.9pc and Anglo Irish Bank plummeted 46.2pc.
“There is a lot of fear and irrationality out there in the market at the moment,” said Kevin McConnell, head of equity research at Bloxham Stockbrokers.
“If you look at AIB alone, if you strip out the value of its Polish and American business, the market is essentially valuing its Irish and UK operations at zero. This is a ridiculous valuation.”
The analyst noted trading activity had also dried up significantly since the Financial Regulator clamped down almost two weeks ago on investors taking bets on banking stocks falling in value – known as “short selling”.
“Some €186m worth of trading was carried out in the four Irish banks in Dublin and London yesterday, but they lost €3.6bn between them. In a normal market, you’d only expect a fraction of this move with that level of trading activity,” Mr McConnell added.
The Government is facing intense pressure from Irish banks to help shore up confidence in the financial system. Speaking before the Houses of Congress vote, Taoiseach Brian Cowen reiterated the Government's determination to ensure the stability of Irish banks.
“The Government, from our point of view, we're very committed to maintaining the stability of the Irish financial system and we are determined to protect all deposits in Irish credit institutions and the Minister for Finance has made that clear, and that will remain the case,” he said. “Also, to make the point that we are very determined to do whatever is necessary to maintain the stability of the system, and our regulatory authorities monitor the situations on an ongoing basis.”
However, Fine Gael finance spokesman Richard Bruton last night said the Government needed to hold immediate talks with the financial sector in the wake of the defeat of the US rescue package.
He said he was disappointed by the outcome of what was expected to be one measure to offer stability and confidence to international markets.
“I would encourage the Government to ensure it is speaking with banks and the regulatory authorities, to be as prepared as possible for the impact on the Irish banking sector,” he said.
Meanwhile, sources dismissed a widespread market rumour yesterday that the Financial Regulator was preparing to suspend trading in Irish banking stocks for a period.
In the UK, emergency action saw Britain’s Bradford & Bingley, Benelux giant Fortis and Iceland’s Glitnir being partially nationalised.
Munich-based Hypo Real Estate was forced to secure a €35bn emergency credit line from the German government and rival banks after DEPFA Bank, the Irish-based publicsector lender it bought last year for €5bn, encountered funding difficulties. The group employs about 300 people in Dublin. Fortis lost 24pc of its value after it received a bailout of €11.2bn from the Dutch, Belgian and Luxembourg governments.
Another shotgun deal across the Atlantic saw regional bank Wachovia being snapped up by Citigroup for $2.2bn. A move by central banks to pump hundreds of billions of dollars to get banks lending to each other again failed to appease the markets.
The Federal Reserve hiked the amount of American currency available to other peers globally from $330bn to $620bn, while the European Central Bank injected a €120bn short-term credit.
Hypo Real Estate slumped 74pc in Frankfurt after the German government and a group of private banks agreed to provide a €35bn guarantee to rescue the bank from insolvency.