Finance and Economic

Worries that weakening Eastern Europe economies will undermine Western banks weighed on markets Tuesday, while U.S. investors awaited details of restructuring plans from two of Detroit’s Big Three automakers.

U.S. President Barack Obama prepared to sign an economic stimulus plan into law, but questions over the effect emerging markets will have on the global recession were in the spotlight.

With concerns growing over the deterioration of emerging markets, U.S. stocks followed European markets lower. The Dow fell more than 3 percent while an index of leading European shares dropped 2.5 percent.

The euro fell to a two-and-a-half-month low against the U.S. dollar after a Moody’s Investors Service report said the recession in Eastern Europe will be more severe than elsewhere.

A combination of higher provisions for bad debt, a rise in bank borrowing costs and falling Eastern European currencies will weigh on banks’ profitability and erode their capital base, Moody’s said in a statement released overnight.

“Investors are focusing on bad news from Eastern Europe … (which) is playing a very important role in the weakness of the euro,” said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

The report showed the market believed “emerging Europe is the subprime of Europe and now everybody is running for the door,” one analyst said.

Much of the world has been pushed into recession by a credit crisis, prompted by the collapse in the U.S. housing market and high default rates on subprime mortgages, housing loans made to borrowers with low credit ratings no fax needed payday loans.

Governments have employed a mixture of measures — from stimulus packages to bank bailouts — to try to ease the deepening recession, but some have been criticized for putting national interests before trade commitments.

Later on Tuesday, U.S. President Barack Obama is expected to sign a $787 billion stimulus bill that has been criticized for its “Buy American” clause, which says companies must use U.S. steel and other U.S.-made goods. French and Italian auto bailouts have also been criticized by European policymakers.

The United States also hopes a $17.4 billion bailout will help its auto industry. General Motors Corp and Chrysler have been asked to submit survival plans to justify the loans, and are due to present the measures to cut costs later on Tuesday.

German automaker Daimler, a Chrysler shareholder, said on Tuesday swung to a quarterly loss and forecast the global recession would slash auto demand by about 10 percent this year.

NEGATIVE PATTERNS

U.S. banks led North American equities lower as investors questioned the efficacy of government actions and weighed how long the recession will last. The S&P 500 dipped below 800 for the first time since November.

“It’s possible that all four quarters will be negative this year. The data continues a pattern of bad data that will weigh on the markets for the foreseeable future,” said Jim Awad, managing director at Zephyr Management in New York. 

Read more