By Jeremy Gaunt, European Investment Correspondent
LONDON, Sept 26 (Reuters) - Washington's failure to agree a
bailout plan for the shattered banking system sent global stocks
sharply lower on Friday and weakened the dollar, while the
crisis put money markets under massive stress.
Government bond yields fell as investors sought safe havens.
"It's all about ongoing concerns about the banking crisis
and where it's going to end," said Padhraic Garvey, head of
investment grade strategy at ING in Amsterdam.
European shares opened close to 2 percent down and Japanese
stocks lost around 1 percent after negotiations over the White
House's unprecedented $700 billion bailout scheme degenerated
into chaos overnight.
Adding to the drama, U.S. authorities also shut down
Washington Mutual <WM.N>, the largest U.S. savings and loan
bank, and sold its banking assets to JPMorgan Chase & Co <JPM.N>
for $1.9 billion.
Underlying the drying up of finance that lies behind the
crisis, three-month dollar interbank rates -- which include the
seasonally illiquid Christmas period -- were indicated at around
4.5 percent on Reuters <USD3MD=>, at least 275 basis points
above expected U.S. interest rates in December.
Meanwhile, the closely-watched TED spread -- the difference
between market-based dollar rates and three-month U.S.
government borrowing rates -- stood around 350-400 basis points.
The spread, a gauge of risk aversion and tightness in
short-term lending, ballooned last week to almost 500 basis
points, the widest in over a quarter of a century.
Intensifying money market stress and a global shortage of
dollars comes despite strenuous efforts by major central banks
to pump in hundreds of billions of dollars of liquidity into the
money market to keep the interbank system afloat.
Central banks in the euro zone, Britain and Switzerland
stepped up their efforts on Friday with a new plan to pump in
one-week dollar funds.
IMPASSE
Negotiations on the White House plan to buy up toxic assets
came a cropper after House Republicans offered a rival proposal
to offer mortgage insurance.
Talks were to continue later on Friday and some investors
believed agreement would eventually be found.
"We are not too concerned about failure to announce the
package overnight. We think this is natural politics playing its
hand in the run up to the presidential elections," said Graham
Secker, UK equity strategist at Morgan Stanley.
"We would expect some positive results from the discussions
within the next few days."
The uncertainty nonetheless hit stock markets, particularly
in the finance sector.
The FTSEurofirst 300 <> index of top European shares
was down 1.4 percent with the likes of Royal Bank of Scotland
<RBS.L> down 4.8 percent and UBS <UBSN.VX> off 3.5 percent.
Insurers were also weak, with France's AXA <AXAF.PA> falling
2 percent.
Earlier, Japan's Nikkei stock average slipped 0.9 percent on
Friday to its lowest close in eight days.
The benchmark <> shed 113.37 points to 11,893.16. The
broader Topix <> was down 0.5 percent at 1,147.89.
In a sign of how widespread worry about stock markets and
the global economy has become, a Japanese retail investor
sentiment index tumbled to match its lowest point ever, with
individual investors remaining pessimistic about domestic
equities [].
SAFE HAVENS
On currency markets, the low-yielding Japanese yen jumped
against the euro and dollar as investors ran from riskier
assets.
The euro extended earlier losses to fall 1.3 percent on the
day and slide below 154 yen <EURJPY=>, while the dollar fell 1
percent to 105.36 yen <JPY=>.
Euro zone government bond prices rose. Two-year paper
yielded 3.786 percent <EU2YT=RR>, 7 basis points less than in
late Thursday trade while 10-year Bund yields were 3 basis
points lower at 4.194 percent <EU10YT=RR>.
(Additional reporting by Emelia Sithole and Dominic Lau,
editing by Mike Peacock)
