The US Treasury backed away from using a $700 billion bailout fund to cleanse bank balance sheets of toxic mortgage debt, while Europe reported more gloomy economic news and the World Bank warned that international trade may contract in 2009.
Secretary Henry Paulson, in the most explicit sign yet that Treasury was abandoning its initial plan for the rescue funds, said on Wednesday he preferred a second round of capital injections into financial companies to help them weather the worst market crisis in 80 years.
"Our assessment at this time is that this (the purchase of toxic assets) is not the most effective way to use funds," Paulson told a news conference. That added to worries sparked by gloomy economic data from Britain and the eurozone, suggesting the world economy was headed for recession and another round of interest rate cuts.
"We are certainly prepared to cut ... again, if that proves to be necessary," Bank of England Governor Mervyn King told a news conference after forecasting slower British growth and minimal inflation in 2009. Asian and European stocks fell, while Wall Street dropped 3 percent, dragged down at the opening by electronics chain Best Buy''''s move to cut its full-year outlook. Oil prices slid further below $60 a barrel.
"Whether it''''s economic indicators or company news, it''''s just too awful," said Takashi Ushio, head of the investment strategy division at Marusan Securities in Tokyo.
RESCUE EFFORTS AT RISK: Elsewhere, some efforts to cure both national economies and companies ailing from the credit crisis looked like they were in danger on Wednesday. The International Monetary Fund withheld official backing for a $6 billion bailout plan for Iceland, the Financial Times reported, putting loans to the North Atlantic country at risk.
Some of British bank Barclays'''' biggest shareholders have threatened to vote against a plan to raise 7 billion pounds ($10.8 billion) of capital unless it improves terms of the deal, British newspapers reported. Aides to US President-elect Barack Obama, meanwhile, were playing down reports of tension with the Bush administration over help for the stricken car industry.
Democratic congressional leaders said they would push for emergency legislation to bail out struggling US automakers, possibly by amending the $700 billion rescue program, which now only applies to banks and other financial firms.
Paulson on Wednesday said that non-financial firms as well as banks may need additional cash infusions but that he saw "implementation difficulties" aiding companies that were not federally regulated.
General Motors Corp, Ford Motor Co and Chrysler LLC are seeking $25 billion in urgent assistance, in addition to loans to develop fuel-efficient cars. The World Bank said more countries were seeking its help and its president, Robert Zoellick, warned that global trade may decline next year for the first time in more than a quarter century as the credit crisis reduces trade financing. Zoellick said the bank expected its lending to increase to $35 billion this year from $13.5 billion last year.
DECLINE AND FALL: Questions were beginning to be asked, however, about just how much help governments can give. "The US'''' financial resources are already stretched and a flood of new demands may overwhelm a government already staring down at a record budget deficit next year," UBS economists said in a note.
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