By Omoh Gabriel with Agency report
Nigeria foreign reserves and other financial assets denominated in dollar are declining in value by the day as the global financial crisis continued to take its toll. Indication to this effect emerged weekend as the value of the dollar dropped against other currencies. The loss in value of the dollar means that the value and purchasing power of Nigeria foreign reserves is declining though Nigerian banks have not been affected by the crisis as they have not lent money to banks in US. Experts are agitating that the reserves be moved from dollar to other more stable currencies. However, the foreign reserve are said to be safe as the banks where they are kept have not been affected thus far..
As of yesterday the US Senate agreed to vote on President Bush controversial $700 billion financial rescue package that will include a sharp increase in the amount of bank deposits insured by the Federal Deposit Insurance Corporation, but also includes a package of tax breaks the House of Representatives has rejected. If the bail out plan sails through it may offer some relief and confidence to investors to begin to invest and trade in bank instruments. On Tuesday, investor in the US lost about a trillion dollar to falling prices of shares as a result of the rejection of the bail out plan by Congress.
The financial crisis started when last Month the United States of America, the hub of capitalism and the high priest and chief advocate of free market economy announced a $200bn (¬£100bn) bail out for two mortgage lender. In announcing the bail out President Bush said the firms had posed “an unacceptable risk” to the economy. In a dramatic move, US Treasury Secretary Henry Paulson announced the rescue plan. The rescue cost the US government $$200bn (¬£100bn) as it invests fresh capital into the stricken mortgage giants to keep them solvent. The collapse of the two lenders would have frozen US mortgage lending for years, and would likely have lead to even steeper declines in house prices. What readers must understand however is the difference between systemic failure and the failure of a single bank or company. In a systemic failure as was the threat in the Nigeria financial system before consolidation, the entire economy is at risk. This is what had happen in the mortgage sector in the US. Many banks both in the US and Europe have lent money to these two and many of the individuals they had lent money to could not pay thus triggering off wide range of mortgage defaults. As mortgage and credit is the bedrock of developed economy the situation immediately become complex and require government intervention.
The move was intended to keep the two companies afloat, amid fears that either could go bankrupt as borrowers default on their home loans. Together, Freddie Mac and Fannie Mae own or guarantee about $5.3 trillion (£3 trillion) of mortgages. But they have made a combined loss of about $14bn in the past year and officials were worried that they would no longer be able to continue functioning if such losses continued. Banks around the world are highly exposed to the two companies and therefore, given the febrile state of markets across the world, it had become dangerous for doubts to persist about whether they were viable and would be able to keep up the payments on their massive liabilities.
This had resulted in stock market melt down in almost all free market economies. As this was going on several other banks, in the US, Britain and Europe failed thus resulting in a global financial crisis.
Senate Democratic leader Harry Reid received unanimous consent from the Senate on Tuesday to schedule the vote on the revised package the White House says is needed to avoid a broad economic downturn. As the US Senate prepares for the crucial vote, the global markets have reacted as follows:
* The UK’s FTSE 100 was up 77 points, or 1.6 per cent, at 4,977 in early afternoon trading in London
* Germany’s Dax was down 38 points, or 0.7 per cent, at 5,793, although the fall was intensified by car-maker Daimler dropping 4.5 per cent on fears of a profit warning
* France’s Cac 40 was up 1.6 points, or 0.04 per cent, at 4,039, after earlier posting minor falls
* Earlier on Wednesday, Japan’s Nikkei index had ended up 1 per cent while Australia’s main index closed up 4 per cent
* On Tuesday, the Dow Jones index of top US shares closed up 4.7 per cent
In the UK stocks were also lifted by news the Bank of England is to pump a further $30bn (£17bn) into the money markets. George Bush says the cost of not acting will be higher than the $700bn rescue deal
And UK banks Lloyds TSB and HBOS rose strongly – up 8.5 per cent and 7.3 per cent respectively – after Prime Minister Gordon Brown said he was confident Lloyds TSB’s takeover of HBOS would go ahead.
In the United States citizens are angry with government over the melt down. Agency report said that Auto salesman Ryan Thomas watched as the credit crisis hit Main Street America. On Monday, as Congress rejected a bailout plan and stock markets plummeted, Thomas had to turn away a customer with $3,000 in his hand who wanted to buy a new vehicle. “He wanted to get into a bigger truck for his job, he was a union worker,” Thomas said. But the man still owed money on the vehicle he was trading in, so his loan request was denied.
“He didn’t have enough money down. He would have needed about $5,500 down and he had $3,000. A year ago that was a piece of cake,” Thomas said. The customer left without his American-made vehicle, Thomas lost another sale — and somewhere an auto-worker made one less truck, a tiny ripple in the growing U.S. financial crisis.
As Wall Street collapses and politicians in Washington struggle to agree on a rescue package, credit markets across America and Europe are grinding to a halt, leaving many business owners and would-be borrowers alike without money to get by. Anger and blame are everywhere. While outraged voters besieged members of Congress with calls and e-mails demanding lawmakers reject a White House plan to bail out a sinking Wall Street, some experts believe the resulting stock crash and credit panic may spur a new rescue campaign. The House of Representatives voted the plan down on Monday, but top lawmakers said they hoped a revised bailout bill could clear in the near future.
“Some of the folks in Congress … will start to hear it from the other side now,” said Al Kugel, chief investment strategist at Atlantic Trust in Chicago. The rescue plan, which would allow the America Finance Ministry to buy problem mortgage-related assets from banks, had been the main hope for government action to unlock credit markets and head off a deeper economic downturn in the United States and abroad.
But Senate leaders attached the measure to a package to extend business and energy tax breaks that a number of House Democrats have opposed, which could imperil votes there after Monday’s narrow defeat of the original bill. House Republicans leaders quickly embraced the revised package, while House Democratic leaders issued cautious statements.
Financial markets were little changed following the report, as investors awaited the outcome of the U.S. Senate’s vote on a financial sector bailout bill. U.S. stock index futures indicated a weaker open on Wall Street and U.S. government bonds, which usually benefit more from signs of economic weakness, were steady at higher levels. The ADP Employer Services report was jointly developed with Macroeconomic Advisers LLC.
Despite hopes that enough changes have been made to get the bill passed, investors remain nervous. If the Senate does approve the bill it will still have to go to the House of Representatives, which voted against the first version on Monday. European shares were mixed in trading before US exchanges opened.
In Brussels, European Union President Jose Manuel Barroso said member states had to start working closer together to help tackle the continuing financial crisis. “We are asking and urging member states for closer cooperation,” he said. “It is critically important for confidence in the markets.
“It’s not just a problem of injecting liquidity, we also need to inject credibility in the European response.”
Political momentum The new US package is broadly similar to the first, but includes new measures to help gain Congress’s backing. Banks are now crying that they have ‘no money to lend” due to their over exposure in the US mortgage scandal. One of the new clauses will raise the government’s guarantee on savings from $100,000 (¬£56,000) to $250,000. To get through the Senate, the bill will require the backing by 60 of the 100 senators. However, it will then have to return to the House of Representatives on Thursday. Presidential candidates John McCain and Barack Obama, who both support Mr Bush’s efforts to bail out the economy, say they will return from campaigning to vote in the Senate.
And senior Democrats have pledged to find a bipartisan solution.
“Working together, we are confident we will pass a responsible bill in the very near future,” Senator Harry Reid and House of Representatives Speaker Nancy Pelosi wrote to President George W Bush.
However, some members of Congress continue to press for more fundamental changes, such as insurance for bad loans, rather than the removal of the loans from the books of financial companies.
On Tuesday President Bush had warned of “painful and lasting” consequences for the US should Congress fail to agree a rescue plan. Analysts say the Senate is more likely to pass the bill because senators are not facing the same pressure from voters – who are generally opposed to the bailout – as members of the House. All representatives face re-election in November compared with only one-third of senators.