Financial Crisis Exposes Flaws in U.S. Economy, Tarnishes Image

By Rich Miller

Sept. 18 (Bloomberg) -- The rapid-fire rescues of financial firms may end up tarnishing America's ``brand'' as the moves expose defects in the U.S. economy, undermining its standing with foreign buyers of the dollar and U.S. Treasury securities.

The government's actions might add hundreds of billions to a budget deficit already expected to hit a record next year. The salvage operations, which include Tuesday's takeover of American International Group Inc., also raise questions about the U.S. commitment to a free-market economy that, until recently, was the envy of the world.

America's credit ``profile is now weaker because contingent risks have become actual risks to the U.S. government,'' said John Chambers, managing director of sovereign ratings at Standard & Poor's in New York.

The result: Foreign investors may demand higher compensation for providing the money the U.S. government and economy depend on. That, in turn, could translate into lower living standards for Americans as borrowing costs are pushed higher and the dollar is pulled lower.

There's not much evidence that any of this is happening yet. The yield on the 10-year Treasury note fell to 3.4 percent yesterday from 3.9 percent two months earlier as investors sought refuge from the recent turmoil in financial markets. The U.S. currency, meanwhile, has strengthened to $1.43 per euro from $1.59 on July 17.

Hedge Against Losses

Yet in what may be a sign that the complacency won't last, the cost to hedge against losses on U.S. government debt rose to a record yesterday after the Federal Reserve's rescue of insurance giant AIG. Benchmark 10-year credit-default swaps on Treasuries increased 4 basis points to 30, more than double those on government debt sold by Austria, Finland or Sweden, according to BNP Paribas SA.

Until now, the U.S. has enjoyed a special status among investors, thanks to the size of its economy, the power of its military and the depth of its financial markets. The dollar supplanted the British pound as the world's reserve currency after World War II, enabling America to borrow freely from abroad and run up big trade deficits. All this fed the country's sense that the U.S. was exceptional, destined to be the global political and economic leader.

America can no longer take its privileged position for granted. It has already lost some of its diplomatic luster because of President George W. Bush's go-it-alone foreign policy and the invasion of Iraq.

Dollar's Rival

The successful introduction of the euro a decade ago has created a rival for the dollar as the world's main currency for trade and investment. The rapid growth of emerging markets, particularly China, has also undercut America's attractiveness to the world's financiers.

That's why the ongoing financial turmoil is so dangerous. The meltdown has created ``a crisis of confidence in the U.S. government,'' said Jim Leach, a former Republican U.S. congressman from Iowa who is now a professor at Princeton University in New Jersey. ``The twin pinions of American strength -- our politics and our finance -- are under the gun today.''

Estimates of the eventual price the U.S. government will have to pay to end the credit crisis vary widely, ranging as high as $2 trillion. Many are lower than that, at roughly a half-trillion dollars -- equal to about 4 percent of gross domestic product.

Facing Liabilities

While such a bill would be more than twice what the U.S. paid in today's dollars to resolve the savings-and-loan crisis in the early 1990s, budget experts said it would be manageable to finance on its own. The trouble is, the federal government already faces liabilities in the tens of trillions of dollars as baby boomers retire and begin collecting Social Security and medical benefits.

Joshua Rosner, an analyst with research firm Graham Fisher & Co. in New York, said the costs are unclear partly because the Treasury is effectively keeping some of them off the government's balance sheet by parking them at the Fed. That's the same sort of practice that got Citigroup Inc. and other banks in trouble during the now year-old credit crisis.

Fed Chairman Ben S. Bernanke and his colleagues committed $29 billion to back the takeover of Bear Stearns Group by JPMorgan Chase & Co. in March. Treasury Secretary Henry Paulson followed with a pledge this month of as much as $100 billion each for Fannie Mae and Freddie Mac to ensure that the two mortgage companies continue supporting the battered housing market. The Fed then kicked in an additional $85 billion this week for AIG.

Reassure Investors

Harvey Pitt, chief executive officer of Kalorama Partners in Washington and former chairman of the Securities & Exchange Commission, argued the rescues would help reassure foreign investors that the U.S. isn't prepared to accept a free-fall in financial markets. The bailouts, unfortunately, also do something else: They highlight the fragility of the U.S. financial system.

``The foreigners are torn right now,'' said Mohammed El- Erian, co-chief executive officer of Pacific Investment Management Co. in Newport Beach, California. ``On the one hand, they are stunned by what is happening to the U.S. financial system. On the other, they are impressed that we are getting a policy response that is relatively fast.''

Sovereign-wealth funds invested just $900 million in new capital in U.S. and European financial institutions so far this quarter. That's down from $6.43 billion in the second quarter, $19.7 billion in the first and $28.5 billion in the final quarter of last year, according to data compiled by Bloomberg News.

Increasing Uncertainty

Nobel Prize-winning economist Joseph Stiglitz said that the haphazard nature of the bailouts may discourage investors from putting money in the U.S. because it increases uncertainty about who will survive and who will fail.

``We used to believe that America was a country or a government that was based on the rule of law,'' the Columbia University professor said in a Sept. 16 interview on Bloomberg Radio. ``Today, we appear to be a law of discretion. Who gets bailed out seems to be totally up to the discretion of Paulson, of Bernanke.''

William Poole, a senior economic adviser at Merk Investments LLC and former St. Louis Fed president, said in a Bloomberg Television interview yesterday that the market system would be hurt by increased regulation in the wake of the rescues.

`Heavier Regulatory Hand'

``It is likely that we will see a much heavier regulatory hand that, in the end, is going to saddle lots of companies with unnecessary costs and damage our market system,'' said Poole, a Bloomberg News contributor.

Foreigners' appetite for investing in the U.S. may also be tempered by the impact of the crisis on the economy. Allen Sinai, chief economist at Decision Economics in New York, said the U.S. is in for an extended recession as the financial-services industry -- a major source of increased productivity growth in the past -- consolidates.

``The federal government assumes that it can borrow whatever it wants from foreign lenders at low interest rates for as long as it wants,'' said David Walker, former comptroller of the U.S. Government Accountability Office who's now head of the Peter G. Peterson Foundation in New York. ``That's an imprudent assumption.''

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

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U.S. Meltdown Reflects Regulators' Failures, Wu Says

By Li Yanping and Nipa Piboontanasawat

Sept. 18 (Bloomberg) -- U.S. regulators failed to manage the risks of new financial products and China needs to learn the lessons to avoid its own meltdown, former central bank deputy governor Wu Xiaoling said.

``The U.S. crisis reflects regulatory problems in the U.S. and innovative financial products that ignored basic economic rules,'' Wu told a financial conference in Beijing today. ``The U.S. crisis today would be China's tomorrow if financial products such as securitization are introduced without proper risk-control measures.''

China has resisted years of pressure from U.S. Treasury Secretary Henry Paulson to open its financial system more quickly and add new products. Those barriers helped the nation limit its losses and writedowns from the credit-market crisis to less than 1 percent of the $516 billion global total.

``Now is the time for the Chinese to say that `you didn't do it quite right either,''' said David Cohen, an economist at Action Economics in Singapore. ``The world is very dependent on China to help cushion the downturn.''

This week, the crisis drove Lehman Brothers Holdings Inc. into bankruptcy and forced American International Group Inc. into the hands of the U.S. government. Merrill Lynch & Co. sold itself to Bank of America Corp. Morgan Stanley is weighing a merger with Wachovia Corp. and other banks, people familiar with the matter said.

Asian Stocks Tumble

Asian stocks tumbled to the lowest in three years today while gold and U.S. Treasuries surged as concerns mounted that more financial firms will collapse. China's benchmark CSI 300 Index fell 5.1 percent as of 1:27 p.m. in Shanghai.

Paulson said last year that China risked wasting trillions of dollars in resources and lost economic potential unless it rapidly opened its capital markets.

``An open, competitive and liberalized financial market can effectively allocate scarcer resources in a manner that promotes stability and prosperity far better than government intervention,'' Paulson said in Shanghai in March last year. ``Time is of the essence.''

China's government may thwart new financial products including derivatives and enhance risk-management practices to avoid a U.S.-style crisis, the bank regulator's deputy research chief, Fan Wenzhong, said today at the Beijing conference. He's also a former Lehman economist.

Stability `Not Speed'

The aim of China's financial reforms is ``not speed, it's about stability,'' he said.

In the past three years, China dropped a decade-old currency peg to the U.S. dollar, introduced foreign-exchange swaps and forwards and expanded the bond market as the government moves to a more market-driven financial system.

It's yet to allow margin trading -- where investors borrow money to buy shares -- or futures contracts based on equity indexes. The central bank said last year that it was tightening disclosure rules on sales of asset-backed bonds.

U.S. banks ``dared'' to lend to riskier borrowers in the hope that a housing boom would continue and interest rates would stay low, Wu said. Sellers of financial derivatives ``abandoned the principle of letting clients fully understand their risks,'' she said.

Crisis `Far From Over'

Wu, the deputy director of the Financial and Economic Affairs Committee of the National People's Congress, which is China's legislature, wouldn't say when the crisis may end.

``No one really knows how many times these subprime derivatives were repackaged and how many times the risks were amplified, so the crisis is far from over.''

China's losses and writedowns are $4.3 billion, according to Bloomberg data.

The nation's stocks fell today as international credit markets seized up, stoking concern that more financial companies will collapse. Industrial & Commercial Bank of China Ltd., which has $151.8 million at risk because of the Lehman collapse, dropped 4.7 percent.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net

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Asian Policy Makers Predict No Repeat of 1997 Financial Crisis

By Shamim Adam

Sept. 18 (Bloomberg) -- Asian policy makers see little risk their countries will be hit by a crisis similar to the economic meltdown of 1997, downplaying concern the U.S. turmoil will infect the region's financial system.

``This is nothing'' compared with 1997, Bank of Thailand Governor Tarisa Watanagase said on Bloomberg Television in Bangkok today. ``The direct impact is very limited, although we may see some slowdown through the trade channel later on.''

Central banks continued to pump money into their financial systems to ensure liquidity as investors sold shares of Australia's Macquarie Group Ltd. and Kookmin Bank, South Korea's biggest lender. Asian banks have limited exposure to Lehman Brothers Holdings Inc., which filed for bankruptcy earlier this week, officials say.

``The risk to Asian banks is more from the impending economic slowdown and market turmoil than from direct exposure to the distressed U.S. financial institutions,'' said Ritesh Maheshwari, a Standard & Poor's analyst in Singapore. Their ``strengthened balance sheets as a result of healthy profits can withstand the impact of likely losses from direct exposure.''

The Asian financial crisis, set off by plunging currencies, led to the collapse of companies as they buckled under billions of dollars of debt, forcing Indonesia, Thailand and South Korea to turn to the International Monetary Fund for bailouts. The region has since accumulated more than $3.3 trillion of reserves, about half of the global total.

BOJ's Shirakawa

``I don't think a financial crisis will take place in Asia,'' Bank of Japan Governor Masaaki Shirakawa said yesterday. ``The situation of Asian economies is different from the time of the 1997-1998 crisis. They have plenty of foreign reserves.''

The Japanese central bank today added 2.5 trillion yen ($23.9 billion) to its financial system in its third day of fund injections, while Reserve Bank of Australia pumped in A$3.015 billion ($2.4 billion).

``There is a credit crunch everywhere, even in Japan, but it's relatively better here as Japanese banks are still okay,'' said Susumu Kato, chief economist in Tokyo at Calyon Securities, a primary dealer required to bid at government debt sales. ``Domestic institutions don't want to give money to foreign institutions, so the BOJ stepped in to stabilize the market.''

Lehman's bankruptcy, the sale of Merrill Lynch & Co. to Bank of America Corp. and the U.S. government bailout of American International Group Inc. this week has sparked concern of more financial failures, sending the cost of short-term credit higher in the U.S. and Europe. In Asia, money market rates have remained relatively low.

Asia Vs U.S.

The difference between what the Japanese government and banks pay to borrow yen for three months reached its lowest in six months. By contrast, the so-called U.S. TED spread expanded to the widest since Bloomberg began compiling the data in 1984.

The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said yesterday. The increase was the biggest since Sept. 29, 1999.

Japan's banks and insurers, including Mitsubishi UFJ Financial Group Inc., have announced a combined 245 billion yen of potential losses tied to the collapse of Lehman, while lenders in China said they have about $384 million of exposure to the U.S. securities firm.

Potential losses of Japanese banks ``seem to be within the levels that can be covered by their profits,'' Bank of Japan's Shirakawa said. ``There's no concern that the latest events will threaten the stability of Japan's financial system.''

Thailand, which triggered the Asian financial crisis with the devaluation of its baht in July 1997, has no shortage of capital and the nation's lenders are ``strong and resilient,'' Tarisa said today.

Thailand's Tarisa

The banking industry is ``a lot more cautious and risk adverse ever since the 1997 crisis,'' she said. ``We had learnt from the crisis. I don't think there is any chance at all that one of our banks will come into problems.''

The exposure of local banks in the Philippines to Lehman is between 0.3 percent and 0.4 percent of their total assets, central bank Governor Amando Tetangco said in a Bloomberg Television interview today. Losses stemming from the holdings may hurt bank earnings though won't damage their capital, he said.

Australia's bank regulatory system is strong enough to give customers ``certainty'' about the state of their lenders, Prime Minister Kevin Rudd said even as he warned that it was a serious time for the nation's financial institutions.

IMF Bailouts

During Asia's 1997 financial crisis, Indonesia, Thailand and South Korea spent most of their currency reserves attempting to prop up their exchange rates after investors abandoned them. The IMF arranged more than $100 billion of loans to the three countries after their currencies collapsed.

``Emerging Asia should be relieved that, unlike the 2001 tech bubble burst and the 1997-98 financial crisis, the `action' has started elsewhere for a change,'' said Paul Gruenwald, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. ``As a result, the region seems likely to pass through the current credit crisis relatively well.''

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

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Fed, ECB, BOE, BOJ Take Coordinated Action to Ease Tensions

By Brian Swint

Sept. 18 (Bloomberg) -- The Federal Reserve, Europe's biggest central banks and the Bank of Japan said they are taking coordinated action to ease tensions in financial markets.

``The action is designed to address the continued elevated pressures in U.S. dollar short-term funding markets,'' the central banks said in a statement today.

The Bank of England said it will offer financial institutions $40 billion in overnight loans daily. The first loan will be today and the amount will be reviewed ``on a regular basis,'' the U.K. central bank said in a statement.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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SNB May Leave Benchmark Rate at 7-Year High to Fight Inflation

By Joshua Gallu

Sept. 18 (Bloomberg) -- The Swiss central bank will probably leave its main lending rate at a seven-year high today to ensure inflation will slow below its 2 percent limit.

The Swiss National Bank's Governing Board, led by Jean-Pierre Roth, will keep the three-month Libor target at 2.75 percent for a fifth quarter, all 19 economists surveyed by Bloomberg said.

``Monetary policy in Switzerland is at a crossroad,'' said Guillaume Menuet, a senior European economist at Merrill Lynch International in London. ``There are obvious downside risks to the economy as we've seen in recent data, but it would be premature to ease monetary policy given the inflation outlook.''

Financial-market fallout from the U.S. housing crisis has hammered banks' profits and is a drag on economic growth. The SNB joined central banks around the globe this week to provide extra money to calm markets spooked by the collapse of Lehman Brothers Holdings Inc. At the same time, the 36 percent drop in the price of oil since mid-July may give the SNB room to lower borrowing costs this year without sparking inflation.

The SNB has left its target interest rate unchanged since September 2007 after record defaults on U.S. home mortgages led to losses at the country's two biggest banks, UBS AG and Credit Suisse Group. The Swiss financial industry accounts for about 15 percent of the economy and contributed about 50 percent to growth in recent years.

The SNB will announce its rate decision at 2 p.m. in Zurich.

Financial Turmoil

Global stocks plummeted and bonds surged this week as traders sought the safest investments after Lehman Brothers went bankrupt, Merrill Lynch was bought and American International Group Inc. was rescued by the Federal Reserve. UBS, the European bank hardest hit by the U.S. mortgage crisis, has already booked more than $43 billion in writedowns and had to raise almost $28 billion in fresh capital from investors.

With financial markets rattled and exports slowing, two of Switzerland's main economic engines are stalling. Export growth may slow to about 3 percent this year from about 10 percent in each of the two previous years, the government said in June.

``The SNB shouldn't ignore weak growth,'' said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. ``We need a rate cut as a cushion against this downturn. The SNB will either cut by the end of the year or not at all, because March may be the bottom of the cycle.''

Better Than Others

The economy is still ``in line'' with the SNB's forecast for expansion between 1.5 percent and 2 percent this year, Roth said on Sept. 5. While the economy will weaken further, Switzerland's won't suffer as much as other countries, he said. The Swiss economy grew 0.4 percent in the second quarter even as the economies of neighboring France and Germany shrank.

``Europe is currently closer to recession than Switzerland is,'' Poser said. ``But if you look at the pace at which leading indicators are deteriorating, they're getting increasingly close to recession territory.''

Switzerland's leading economic indicators fell to the lowest level in five years in August and a measure of manufacturing growth slid to a three-year low. At the same time, price increases have eroded households' purchasing power and threaten consumption, the largest part of the economy.

Record prices for oil and food have triggered a surge in inflation worldwide, prompting central banks from Asia to North America to shelve plans to cut rates.

Roth said Aug. 26 in an interview with Finanz und Wirtschaft that he ``hopes'' inflation peaked this summer and that it would be ``absurd'' to use monetary policy to counter rising costs for oil and food. Inflation eased to 2.9 percent in August from 3.1 percent in July, the fastest pace in 15 years.

While the European Central Bank raised its rate in July on concern excessive pay demands may entrench faster inflation, Switzerland faces limited risks of so-called second-round effects as the Swiss economy is ``flexible'' and wage negotiations are decentralized, Roth said.

To contact the reporter on this story: Joshua Gallu in Geneva at jgallu@bloomberg.net

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Fed Prepared to Take Bigger Role in Combating Financial Crisis

By Craig Torres and Steve Matthews

Sept. 18 (Bloomberg) -- Federal Reserve officials are signaling they are prepared to take an even larger role in trying to contain the deepening financial crisis.

A day after Fed officials seized control of American International Group Inc., the Treasury yesterday acted at the Fed's request to fortify the central bank's balance sheet with $100 billion in new cash. Fed officials can use the proceeds to pump money into financial institutions fearful of lending to each other, or to catch the next insolvent bank that's unable to raise capital.

``It is just not credible for the Fed or the Treasury to say they won't put up'' any more money, said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, and a former Fed economist. ``They are the big lender for anyone who runs into trouble.''

Congressional Democrats indicated the Fed has their support to intervene in markets further, while Republicans took the opposite view. The presidential elections, less than two months away, chilled any call to action in Congress to create a publicly funded agency to handle future bailouts.

Using the Fed ``is a backdoor approach,'' said Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh. ``If Congress wants to subsidize the losses at the taxpayer expense, it should do it'' with a transparent fund that is on the federal budget, he said.

Marshaled Holdings

Since the financial crisis began more than a year ago, the U.S. central bank has marshaled its more than $900 billion in holdings into unprecedented action, lending Treasuries against Wall Street's hard-to-finance bonds and providing loans to protect creditors of failing banks and insurers that threatened the financial system. The Fed's latest additions to its balance sheet come as the crisis has grown to wildfire proportions.

Such intervention in the markets isn't what longtime associates of Fed Chairman Ben S. Bernanke were expecting when he took the helm at the Fed in 2006, succeeding Alan Greenspan.

``We all made our lists about what the Bernanke Fed would be like,'' said Brian Sack, vice president at Macroeconomic Advisers and a co-author of research with Bernanke when he was a Fed Board staff member. ``We didn't realize that policy activism would be the single most defining characteristic. They seem willing to do whatever it takes.''

The $100 billion Treasury is adding to the Fed's balance sheet was probably necessary to build confidence, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Of the Fed's $924 billion in total assets, it has $476 billion of Treasuries. Of that, only $196 billion remains free to use for more operations and $85 billion of that may now be needed to accommodate the AIG loan, Crandall said.

Forestalls Questions

``In the absence of the $100 billion, people would have started asking if they are running out of resources,'' Crandall said. The Treasury deposit ``forestalls the question.''

Still, the Fed's actions don't appear to have calmed the panic. Yesterday's 4.7 percent drop in the Standard & Poor's 500 Index means half its gain from the five-year bull market that began in 2002 has now been wiped out. Goldman Sachs Group Inc. and Morgan Stanley, the only two remaining independent brokerages on Wall Street, plunged the most ever. Yields on three-month Treasury bills sank to the lowest since World War II as investors sought the relative safety of government debt.

Uncharted Waters

``We are really in uncharted waters,'' said former Richmond Federal Reserve Bank President J. Alfred Broaddus Jr. ``The question that has to be raised now is, where is all this going to end?''

One cause of the flight to the safest investments is that neither Congress, the Treasury nor the Fed is prepared to establish the rules of intervention. While creditors of Lehman Brothers Holdings Inc. were left to bankruptcy, those of AIG were rescued.

Shareholders lost in every bailout, from Bear Stearns Co. in March to Fannie Mae, Freddie Mac and AIG this month. That created an incentive for investors to dump financial shares and test the government's willingness to insure creditors.

``The whole government backstop hasn't been carried out in an effective manner,'' said Sean Egan, president of the independent rating firm Egan-Jones in Haverford, Pennsylvania. ``It's not just investors who are going to suffer. It's taxpayers too.''

Congressional Democrats said they are content to continue letting Bernanke make his own decisions rather than have Congress create a resolution vehicle with defined rules. Republicans warned the Fed is on the wrong path.

Fed's Authority

Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, said the Fed can act as an ``effective Resolution Trust Fund'' to buy and dispose of bad debt stemming from the subprime mortgage crisis. ``The Fed has the authority to move in this area,'' Dodd told reporters yesterday.

The ranking Republican on the Senate Banking Committee, Richard Shelby of Alabama, said he wants the Fed to let markets work rather than opt for bailouts.

``Where do we stop, where do we draw the line?'' Shelby said in a Bloomberg Television interview. ``I don't know what road'' the Fed ``is going down,'' he said. ``If they don't watch what they are doing they are going down a path of no return.''

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

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Korea Gas Shares Rise on Speculation Subsidies to Be Approved

By Shinhye Kang

Sept. 18 (Bloomberg) -- Korea Gas Corp., the world's biggest buyer of liquefied natural gas, rose the most in more than four months in Seoul trading on speculation parliament will approve a $4 billion plan to cover energy companies' losses.

The shares rose as much as 5.82 percent, or 3,600 won, to 65,500 won, the most since May 8, and traded at 64,800 won as of 11:02 a.m. local time. The Kospi index dropped 2.3 percent.

Lawmakers from the ruling and opposition parties agreed yesterday to pass a 4.57 trillion-won supplementary budget to help cover the losses of state-owned energy companies caused by government controls on fuel prices. The National Assembly will approve the bill today, Korea Economic Daily reported.

``The extra budget will ease concerns over the cash-flow of Korea Gas,'' Joo Ick Chan, an analyst at Hana Daetoo Securities Co., said in a report today. He maintained a `buy' rating on the stock with a price target of 100,000 won.

The extra budget includes a plan to provide state-run energy companies with 1.3 trillion won in subsidies. The government has capped gas prices since November last year to ease inflation that has reached a 10-year high.

The state-run utility must issue 5.6 trillion won of corporate bonds by the year-end to cover rising costs, acting Chief Executive Lee Byung Ho told parliament on Sept. 9.

To contact the reporter on this story: Shinhye Kang in Seoul at skang24@bloomberg.net.

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Climate Institute Says Carbon Plan Handouts to Hurt Economy

By Gemma Daley

Sept. 18 (Bloomberg) -- Australia's plan to give handouts to big polluting companies to compensate for the cost of a planned carbon-trading system will hurt the economy and stymie investment, the Climate Institute said.

The government plans to issue free permits or give a one-off cash bonus to some coal-fired power generators to compensate them for the added expense of introducing a cost on carbon emissions. It plans to introduce a carbon-trading system in 2010 as part of efforts to reduce emissions 60 percent by 2050.

``It is likely to come at a substantial economic cost,'' the Climate Institute says in its submission on the government's so- called Green Paper climate plan. ``We need a study into carbon leakage before handing out what could simply become windfall profits for some of our biggest polluters.''

Prime Minister Kevin Rudd, who ratified the Kyoto Protocol on his first day in office, is yet to set short-term targets for carbon reduction. The government is due to complete the design of the cap-and-trade system and subsidies by the end of the year.

The Climate Institute, in research with McLennan Magasanik, also looked at other demands from industries like liquefied natural gas for handouts to stop companies moving offshore.

``The current proposals to hand out free permits to existing polluters are not likely to deliver a net benefit to the economy and are unlikely to impact on investment decisions,'' the submission says. ``We need a serious discussion on industry assistance and industry plans.''

The submission calls for an independent regulator to set annual cap extensions and direct assistance to affected generators and exporters. It also says a direct proportion of revenue from trading system should help developing countries.

To contact the reporters on this story: Gemma Daley in Canberra at gdaley@bloomberg.net

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Oil Declines Below $97 as Market Turmoil May Slow Fuel Demand

By Christian Schmollinger

Sept. 18 (Bloomberg) -- Crude oil declined in New York, paring yesterday's $6-a-barrel jump, on concern the fallout from the global credit crunch may lead to an economic slowdown, limiting fuel demand.

U.S. fuel demand the past four weeks was down 4.4 percent from a year earlier, the Energy Department said yesterday. Asian stock markets tumbled to their lowest in three years as investors were unconvinced an $85 billion bailout of American Insurance Group Inc. would ease the financial crisis and speculation that more banking firms might collapse.

``The concerns that these bank failures may lead to a worldwide global recession, negatively impacting oil demand, has put downward pressure on prices,'' said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. ``You can't blame investors for being risk averse.''

Oil for October delivery fell as much as 96 cents, or 1 percent, to $96.20 a barrel on the New York Mercantile Exchange. It was trading at $96.21 at 12:35 p.m. in Singapore. It earlier rose as much as 98 cents, or 1 percent, to $98.14 a barrel.

Yesterday, oil rose $6.01, or 6.6 percent, to $97.16 a barrel, the biggest one-day gain since June 6. Oil futures tumbled more than $10 a barrel in the first two days of the week on concern financial-market disruptions may weaken the global economy and cut fuel consumption.

Brent crude oil for November settlement fell as much as 93 cents, or 1 percent, to $93.91 a barrel at 12:37 p.m. Singapore time on London's ICE Futures Europe exchange. It earlier rose as much as 67 cents, or 0.7 percent, to $95.51 a barrel.

Banks Decline

Macquarie Group Ltd., Australia's largest investment bank, plunged 17 percent after Goldman Sachs Group Inc. and Morgan Stanley, the only remaining independent brokerages on Wall Street, fell the most ever.

The MSCI Asia Pacific Index dropped 3.5 percent to 106.74 as of 12:00 p.m. in Tokyo, the lowest since September 2005.

More than $19 trillion has been wiped off global stock market value since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy. This week, Lehman Brothers Holdings Inc. filed for bankruptcy and the U.S. government had to take over American International Group Inc.

U.S. stocks slumped to the lowest in three years yesterday, with the Standard & Poor's 500 Index sliding 4.7 percent.

Fuel Consumption Falls

Prices were supported yesterday after a U.S. government report showed that crude oil stockpiles dropped the most since May because of disruptions from Hurricane Ike.

U.S. crude-oil stockpiles fell 6.33 million barrels to 291.7 million barrels last week, according to the Energy Department. It was the fourth-straight inventory decline. A drop of 3.5 million barrels was forecast, according to the median of responses by 11 analysts surveyed by Bloomberg News.

The total products supplied by refiners for the past four weeks averaged 19.9 million barrels a day. Gasoline consumption averaged 9.21 million barrels a day over the period, down 2.6 percent.

Prices were also supported by concerns over supplies as Nigerian militants have stepped up attacks on oil companies.

Nigeria lost 280,000 barrels daily of its crude output to attacks launched by armed militants in the Niger Delta oil region in the past five days, bringing currently shut output to about one million barrels a day, the state-run oil company said.

``Current shut-in production stands at about one million barrels a day, but it's not necessarily due to militant attacks,'' Levi Ajuonuma, spokesman for the Nigerian National Petroleum Corp. said by phone from the country's capital, Abuja, today. ``Only 28 percent is because of militant action.''

The Movement for the Emancipation of the Niger Delta, the main militant group in the oil region, said it declared an ``oil war'' in the southern delta that accounts for nearly all of the country's oil after the military launched an offensive on Sept. 13 on its positions.

In the last five days the militant group, also known as MEND, has attacked pipelines and oil pumping stations run by units of Royal Dutch Shell Plc, Chevron Corp. and Eni SpA.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.

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Yuan Declines on Speculation China Is Limiting Gains for Growth

By Judy Chen and Kim Kyoungwha

Sept. 18 (Bloomberg) -- China's yuan declined, following the biggest gain in seven weeks yesterday, on speculation the government is limiting the currency's appreciation as the economy slows and financial turmoil escalates.

Non-deliverable forwards contracts show traders are betting the yuan will weaken against the dollar over the next year. China has slowed the yuan's gains this quarter as the country's gross domestic product rose 10.1 percent in the three months through June, the smallest increase since 2005.

``Investors speculate that the government has stopped the appreciation to boost the economy,'' said Liu Dongliang, a Shenzhen-based foreign-exchange analyst at China Merchants Bank Co., the nation's sixth-largest lender. ``The yuan has much downward pressure in the short term.''

The yuan weakened 0.11 percent to 6.8445 against the dollar as of 10:24 a.m. in Shanghai, from 6.8370 yesterday, according to the China Foreign Exchange Trade System.

Non-deliverable forwards contracts indicate the yuan will drop 0.7 percent to 6.8950 per dollar in the next twelve months. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later-specified time and date.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.

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Korean Won Falls After Biggest Gain Since 1998; Bonds Decline

By Kim Kyoungwha and Judy Chen

Sept. 18 (Bloomberg) -- South Korea's won weakened, failing to keep yesterday's biggest gain since 1998, on speculation widening global financial turmoil will prompt investors to shun emerging-market assets. Bonds declined.

The currency shed 19 percent this year, Asia's worst performer, as regional shares tumbled. The U.K.'s Lloyds TSB Group Plc may acquire HBOS Plc, people with knowledge of the decision said. CNBC reported that Morgan Stanley is in talks with China's Citic Group and HSBC Holdings Plc over a possible sale. Foreign investors have sold more Korean equities than they bought every day except seven since Aug. 1.

``The U.S. credit crisis is still under way and the won will remain under depreciation pressure due to a shortage of dollars,'' said Chun Chong Woo, an economist with Standard Chartered First Bank Korea Ltd. in Seoul. ``For the time being, the currency market will see big volatility.''

Korea's currency fell 2.9 percent to 1,149.40 against the dollar as of 11:10 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The won surged 3.9 percent yesterday, the most since March 1998, after the biggest post-Asian crisis drop of 4.4 percent one day earlier.

Implied volatility for one-month dollar-won options rose to 28.75 percent, the highest since at least 1999, according to data compiled by Bloomberg News. Dealers quote implied volatility, a measure of expectations for future currency swings, as part of pricing options.

Vice Finance Minister Kim Dong Soo said yesterday that South Korea may use its foreign-exchange reserves to provide liquidity to the financial system when needed.

`Some Difficulty'

``We will actively consider providing foreign-currency liquidity to financial institutions through the swap market if necessary by using our currency reserves of more than $240 billion,'' Kim said on KBS radio, adding that the U.S. financial turmoil will have a limited impact on South Korea.

Local-currency bonds fell the most in more than three weeks on concern that a prolonged credit crisis in the U.S. is prompting traders to raise cash by selling government debt.

``Securities firms are having some difficulty securing call money in the wake of the demise of Lehman Brothers Holdings Inc.,'' said Lee Dong Kyu, who helps manage the equivalent of $12 billion in local-currency debt for Hana Bank in Seoul. ``They have some exposure to Lehman and are selling their bond holdings, pushing yields higher.''

Korean companies have a combined $1.4 billion of exposure to Lehman and Merrill Lynch & Co., according to figures from the Financial Supervisory Commission. Bank of America Corp. agreed this week to acquire Merrill for about $50 billion,

The yield on the benchmark bond due June 2011 climbed 18 basis points to 5.72 percent, according to the Korea Exchange. The price dropped 0.43, or 43 won per 10,000 won face amount to 101.95. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net

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Dollar Declines on Speculation Banks May Fail on Credit Woes

By Stanley White

Sept. 18 (Bloomberg) -- The dollar fell for a second day against the yen and the euro on speculation more financial institutions will fail as bank lending seizes up.

The currency also fell against the Swiss franc after a record slump in shares of Goldman Sachs Group Inc. and Morgan Stanley, the only remaining independent brokerages on Wall Street. The cost of borrowing in dollars for three months jumped the most since 1999 as a U.S. government bailout of American International Group Inc. failed to ease concern credit losses will spread.

``You can't choose the dollar when the world's financial problems radiate from the U.S.,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co., a unit of Japan's largest brokerage. ``Credit markets show no signs of settling down and traders are focused on whether other banks will fail. This environment supports yen gains.''

The dollar slid to 104.44 yen as of 12:36 p.m. in Tokyo from 104.66 late yesterday in Tokyo. It touched 103.54 on Sept. 16, the weakest since May 27, and Amikura says the currency may fall to 103.80 yen in the coming days. The U.S. currency fell to $1.4355 per euro from $1.4326. It fell to 1.1014 Swiss francs from 1.1029. The yen was at 149.67 per euro from 149.88.

`Crazy' Markets

The MSCI Asia Pacific Index of regional shares fell 3.4 percent, led by banks. U.S. Treasury three-month bill rates were near the lowest since World War II. Gold futures gained 0.8 percent to $857.13 an ounce, extending their biggest jump in 26 years, as investors sought a haven from the credit crisis.

``The dollar's risks remain to the downside,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``Looking at stocks and several other markets you can see things are just crazy. That feeds into speculation about more problems in the financial system.''

The dollar may decline to 103.50 yen today, he said.

The three-month London interbank offered rate, or Libor, for dollars rose 19 basis points to 3.06 percent, the British Bankers' Association said yesterday. The increase was the biggest since Sept. 29, 1999, during the run-up to the new millennium.

Since touching a one-year high of $1.3882 per euro on Sept. 11, the dollar has lost 3 percent. The premium traders pay to protect against the decline of the euro versus the dollar fell for a fourth consecutive day yesterday. The 25-delta risk reversal declined to 0.38 percent after reaching a record high of 1.23 percent on Sept. 11.

Economic Slump

``There are hints that weaker economic news in the U.S. is starting to negatively impact the dollar,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``The capitulation selling of euros against the dollar and the yen may be over.''

U.S. housing starts fell 6.2 percent in August to an annual rate of 895,000, the lowest since January 1991, the Commerce Department said yesterday. Building permits, a sign of future construction, dropped 8.9 percent to an 854,000 pace.

The yen jumped 3 percent against the dollar on Sept. 15, the most in a decade, as Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history, sparking a global stock market rout and a surge in bank loan costs.

The Federal Reserve will provide AIG with a two-year loan, take 79.9 percent of the New York-based company's stock and replace its management. The central bank kept its target rate for overnight lending between banks at 2 percent on Sept. 16, rebuffing calls by some investors for an interest-rate cut.

Australian Dollar Drops

The Australian dollar declined to 79.04 U.S. cents from 79.34 cents late yesterday in Asia. It also fell to 82.60 yen from 84.00 yen. Macquarie Group Ltd., Australia's largest investment bank, led financial stocks lower on speculation the U.S. credit crisis will make it more difficult for the company to repay debt.

The cost to protect against a failure to pay debt by Morgan Stanley and Goldman rose to a record, credit-default swaps showed. Morgan Stanley is weighing a merger with Wachovia Corp. and several other banks, two people familiar with the matter said.

``Risk appetite has imploded and CDS spreads have reached levels making it impossible for the highly leveraged U.S. broker dealers to survive for long,'' analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. ``The current environment of nervous sentiment is likely to see dollar-yen upside limited.''

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

The yen will extend its rally over the next six months, a survey of Bloomberg users showed. Investors are the most bullish on the currency since March, according to 3,470 respondents from New York to Paris and Tokyo in the monthly Bloomberg Professional Global Confidence Index.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net

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Australian, New Zealand Dollars Fall as Carry Trades Unwind

By Candice Zachariahs

Sept. 18 (Bloomberg) -- The Australian dollar traded near the lowest in more than three years against the yen and New Zealand's currency fell as the U.S. takeover of American International Group Inc. failed to restore investor confidence.

The currencies fell as the Standard & Poor's 500 Index lost 4.7 percent, extending its decline from an October record to 26 percent. Goldman Sachs Group Inc. and Morgan Stanley plunged the most ever. That prompted investors to sell Australian and New Zealand assets bought in so-called carry trades using money borrowed in countries with lower interest rates.

``Fear and negative sentiment is driving the market right now,'' said Joshua Williamson, senior strategist at TD Securities in Sydney. ``With the Aussie and kiwi against the yen we've seen further repatriation of funding currencies on carry-trade unwind,'' referring to the local dollars by their nicknames.

The Australian dollar fell 1.2 percent to 82.98 yen at 1:44 p.m. in Sydney from 84.00 yen in late Asian trading yesterday. It touched 81.61, close to the three-year low of 81.45 yen reached on Sept. 16. The Aussie was little changed at 79.30 U.S. cents from 79.34 cents yesterday.

New Zealand's dollar fell 0.1 percent to 69.61 yen from 69.68 yen late in Asia yesterday. It rose 1.1 percent to 66.58 U.S. cents from 65.83 cents.

Asian stocks tumbled to the lowest in three years as Morgan Stanley weighed a merger with banks including Wachovia Corp. to regain investor confidence amid concerns more financial firms will collapse after the AIG takeover.

Currency Volatility

The currencies fell versus the yen as the VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose to 36.22 yesterday, the highest since October 2002.

The Australian dollar has dropped 19 percent against the greenback since touching a 25-year high on July 16 and the kiwi has lost 14 percent as concerns about global growth reduced investor appetite for the currencies.

What's moving currencies now is ``just transactional flows being put through, no one really wants to hold on to the parcel,'' said Alex Sinton, a senior currency dealer at ANZ National Bank Ltd. in Auckland. ``The fundamental direction is still weaker,'' for the kiwi.

The Bank of Japan kept its overnight lending rate at 0.5 percent yesterday and the U.S. Federal Reserve kept its benchmark rate at 2 percent Sept. 16. Interest rates are 7 percent in Australia and 7.5 percent in New Zealand, making them favorites with investors seeking higher returns.

Carry Trades

In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency market moves can erase those profits.

Australian government bonds rose. The yield on the 10-year note fell 10 basis points, or 0.10 percentage point, to 5.471 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.745, or A$7.45 per A$1,000 face amount, to 98.230. Bond yields move inversely to prices.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, fell to 6.86 percent, from 6.89 percent yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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South Korea Wins `Developed' Market Status From FTSE

By Kyung Bok Cho

Sept. 18 (Bloomberg) -- South Korea won ``developed'' status from FTSE Group, enabling its stock market to attract more of the estimated $3 trillion in funds that track the index provider's global benchmark indexes.

The country's equity market was previously classed as an ``advanced emerging'' market by the London-based index provider. The upgrade takes effect in September 2009, FTSE Chief Executive Mark Makepeace told reporters in Seoul today.

Some funds are restricted to investing in developed markets because of their perceived lower risk. Investors who benchmark against FTSE's South Korea indexes may buy shares including Samsung Electronics Co., the world's biggest computer-memory maker, and Posco, Asia's third-largest steelmaker, to reflect the upgrade.

``An upgrade would be positive for Korea as it's a vote of confidence in the market,'' said Suh Kyung Suk, who oversees the equivalent of $2.3 billion in index funds at Samsung Investment Trust Management Co. in Seoul, the nation's biggest index-fund manager. ``Leaving the emerging-market indexes will help reduce volatility, which could lead to an improvement in returns.''

South Korea has been on FTSE's ``watch list'' for a possible upgrade since 2004. The country has taken steps to raise its profile among foreign investors and increase the perception that its market was ready for developed status, such as easing restrictions on over-the-counter transactions.

The benchmark Kospi index, which rose to a record 2,064.85 on Oct. 31, is set for its first yearly loss since 2002 after inflation accelerated to the fastest pace in a decade, and swelling mortgage-related losses at financial institutions raised concern a global credit contraction will worsen.

To contact the reporter for this story: Kyung Bok Cho in Seoul at kcho7@bloomberg.net.

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Oil Rises a Second Day as Investors Seek Haven From Turmoil

By Christian Schmollinger

Sept. 18 (Bloomberg) -- Crude oil rose in New York, the biggest two-day gain in three months, as investors purchased commodities as a safe haven in the midst of Wall Street turmoil.

Oil climbed and gold surged the most in eight years yesterday as Goldman Sachs Group Inc. and Morgan Stanley plunged the most ever. Prices were supported by a fifth day of militant attacks in Nigeria, Africa's largest crude producer, that have disrupted 280,000 barrels a day of production.

``Oil has got a better chance than other commodities to stay strong,'' said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. ``Commodities, especially oil, are where people want to put their money because we have structural supply problems.''

Crude for October delivery rose as much as 98 cents, or 1 percent, to $98.14 a barrel on the New York Mercantile Exchange. It was trading at $97.40 a barrel at 9:56 a.m. in Singapore. Oil has declined 34 percent from the record $147.27 a barrel reached on July 11.

Yesterday, oil rose $6.01, or 6.6 percent, to $97.16 a barrel. The two-day gain was the biggest since June 6. Oil futures tumbled more than $10 a barrel in the first two days of the week on concern financial-market disruptions may weaken the global economy and cut fuel consumption.

Gold Rally

Gold climbed for a second day, extending its biggest jump in 26 years, as investors sought a haven from the credit crisis that's sent equity markets tumbling. Silver also rose.

Gold for immediate delivery rose 0.6 percent to $868.65 an ounce at 9:20 a.m. in Sydney. The metal jumped 11 percent yesterday, its biggest gain since Sept. 3, 1982. Silver rose 1.7 percent to $12.16 an ounce.

U.S. crude-oil stockpiles fell 6.33 million barrels to 291.7 million barrels last week, according to the Energy Department. It was the fourth straight inventory decline. A drop of 3.5 million barrels was forecast, according to the median of responses by 11 analysts surveyed by Bloomberg News.

Prices also advanced after a U.S. government report yesterday showed that crude oil stockpiles dropped the most since May because of disruptions from Hurricane Ike.

U.S. fuel demand averaged 19.9 million barrels a day during the past four weeks, down 4.4 percent from a year earlier, the department said. Gasoline consumption averaged 9.21 million barrels a day over the period, down 2.6 percent.

Nigeria Militants

Nigeria lost 280,000 barrels daily of its crude output to attacks launched by armed militants in the Niger Delta oil region in the past five days, bringing currently shut output to about 1 million barrels a day, the state-run oil company said.

``Current shut-in production stands at about 1 million barrels a day, but it's not necessarily due to militant attacks,'' Levi Ajuonuma, a spokesman for the Nigerian National Petroleum Corp., said by phone from the country's capital, Abuja. ``Only 28 percent is because of militant action.''

The Movement for the Emancipation of the Niger Delta, the main militant group in the oil region, said it declared an ``oil war'' in the southern delta that accounts for nearly all of the country's oil after the military launched an offensive on Sept. 13 on its positions.

In the last five days the militant group, also known as MEND, has attacked pipelines and oil pumping stations run by the Nigerian units of Royal Dutch Shell Plc, Chevron Corp. and Eni SpA.

Brent crude oil for November settlement rose as much as $1.05, or 1.1 percent, to $95.51 a barrel on London's ICE Futures Europe exchange. It was at $95.18 a barrel at 9:58 a.m. Singapore time.

The contract yesterday rose $5.62, or 6.3 percent, to settle at $94.84 a barrel. Prices dropped the previous 14 days, the longest stretch since the contract was introduced in 1988.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.

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Asia Stocks Tumble to 3-Year Low on Bank Woes; Gold, Bonds Jump

By Patrick Rial and Shani Raja

Sept. 18 (Bloomberg) -- Asian stocks tumbled to the lowest in three years while gold and U.S. Treasuries surged as concerns mounted more financial firms will collapse.

Macquarie Group Ltd., Australia's largest investment bank, plunged 17 percent after lending seized up following the U.S. government's takeover of American International Group Inc. Newcrest Mining Ltd. led a rally by gold producers while U.S. three-month Treasury yields fell to the lowest since World War II as investors fled stocks in search of safe havens.

``Confidence has been shattered,'' said Nader Naeimi, a Sydney-based senior investment strategist at AMP Capital Investors, which manages about $108 billion. ``The market is worried about a domino effect in the financial sector, with no one sure who's going to fall next.''

The MSCI Asia Pacific Index dropped 2.4 percent to 107.90 as of 10:40 a.m. in Tokyo, the lowest since October 2005.

Japan's Nikkei 225 Stock Average lost 2.7 percent to 11,431.17. Equity benchmarks throughout the region declined, with Taiwan shares falling 4.2 percent.

More than $19 trillion has been wiped off global stock market value since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy. This week, Lehman Brothers Holdings Inc. filed for bankruptcy and the U.S. government had to take over AIG.

U.S. stocks slumped to the lowest in three years yesterday, with the Standard & Poor's 500 Index sliding 4.7 percent.

Bank Lending Freezes

Macquarie slid 17 percent to A$28.11, taking its loss since a May 2007 high to 70 percent. The outlook on Macquarie's credit rating was yesterday lowered to negative from stable by Standard & Poor's, implying a one-in-three chance of a cut to the rating.

Babcock & Brown Ltd., Australia's second-biggest investment bank, retreated 17 percent to 76.5 cents. Babcock has plunged 97 percent this year, making it the third-largest loser in 2008 on the MSCI World Index behind Fannie Mae and Freddie Mac.

Kookmin Bank, South Korea's largest lender, declined 6.1 percent to 52,800 won. Sumitomo Mitsui Financial Group Inc., Japan's No. 3 listed bank, slumped 5.9 percent to 586,000 yen.

In a sign that banks have lost confidence in the solvency of their competitors, the London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent yesterday, the biggest advance since Sept. 29, 1999.

``This is a major real event where the epicenter is financial firms,'' said Hans Kunnen, head of investment market research in Sydney at Colonial First State Global Management, which holds about $128 billion of assets. ``Because it is banking and banking lies at the heart of all economies, it's disruptive to the real economy as well.''

Unprecedented

The perceived risk of U.S. government debt, long held to be absent of any default risk, also climbed to a record yesterday as the government's involvement in bailing out financial markets weighed on its own financial standing.

``People want to avoid any type of risk,'' said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., with $54.6 billion in assets. ``I've never seen this kind of crisis before,'' said Okumoto, who has been in the financial-services industry for 23 years.

U.S. Treasury three-month bill rates were 0.071 percent as of 9:21 a.m. in Tokyo. They dropped 65 basis points yesterday to close at 0.04 percent. Two-year yields were 1.65 percent, near the lowest since April.

The dollar fell for a second day against the euro.

``You can't choose the dollar when the world's financial problems radiate from the U.S.,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Co., a unit of Japan's largest brokerage. ``Credit markets show no signs of settling down and traders are focused on whether other banks will fail.''

Safe Haven?

Newcrest Mining Ltd. paced gains in Australian gold stocks after the price of gold surged the most in 26 years and silver rose the most since 1979 yesterday.

Newcrest, Australia's largest gold producer, climbed 14 percent to A$24.34, the biggest gain since September 1999. Lihir Gold Ltd. jumped 18 percent, the most in 8 years, to A$2.53 and Sino Gold Mining Ltd. gained the most on record. Sumitomo Metal Mining Co., the biggest in Japan, gained 5.8 percent to 1,104 yen.

Sony Corp., the maker of the PlayStation 3 game console, lost 7.8 percent to 3,300 yen, a level not seen since June 2003. JPMorgan Chase & Co. and Goldman Sachs Group Inc. cut their investment ratings on Sony.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net. Shani Raja in Sydney at sraja4@bloomberg.net.

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Japan's Stocks Tumble, Nearing Four-Year Low, on Bank Concern

By Masaki Kondo

Sept. 18 (Bloomberg) -- Japanese stocks fell toward a four- year low on concern more global financial firms will collapse after the U.S. government took over American International Group Inc. and reports Morgan Stanley is seeking a buyer.

Mizuho Financial Group Inc., Japan's second-biggest listed bank, sank 7 percent, while brokerage Nomura Holdings Inc. lost 6.1 percent. Sony Corp. headed for a five-year low after Goldman Sachs Group Inc. cut its rating. Sumitomo Metal Mining Co., Japan's biggest gold producer, jumped 3.5 percent after prices for the precious metal surged the most in nine years.

``Amid confusion and anxiety in financial markets, investors are more and more reluctant to take risk,'' Yoshinori Nagano, a Tokyo-based senior strategist at Daiwa Asset Management Co., which manages $94 billion, said in an interview with Bloomberg Television. ``Everything hangs on U.S. financial firms.''

The Nikkei 225 Stock Average declined 364.10, or 3.1 percent, to 11,385.69 as of 9:32 a.m. in Tokyo, set for the lowest close since June 2005. The broader Topix index fell 35.86, or 3.2 percent, to 1,085.57, a level not seen since December 2004. All but one of 33 industry groups on the Topix retreated.

Lehman Brothers Holdings Inc. filed for bankruptcy this week and the U.S. government had to bail out largest U.S. insurer AIG, raising concern more global financial companies will fail. Morgan Stanley is weighing a merger with Wachovia Corp. and several other banks, people familiar with the matter said, which would follow the sale of rival brokerage Merrill Lynch & Co. to Bank of America Corp.

More than $19 trillion has been wiped off global stock market values since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy.

Sony Sinks

Mizuho dived 7 percent to 386,000 yen, while market leader Mitsubishi UFJ Financial Group Inc. declined 4.6 percent to 763 yen. Nomura, Japan's biggest brokerage, slumped 6.1 percent to 1,196 yen. Three of the five biggest losers among Topix groups were financial stocks.

Sony dived 6.7 percent to 3,340 yen, headed for the lowest since June 2003. Goldman analyst Yuji Fujimori cut his rating on the electronics maker to ``neutral'' from ``buy.''

The deepening credit crisis spurred investors to seek the relative safety of commodities. Gold futures for December delivery surged 9 percent yesterday, the most since September 1999, while crude oil for October delivery soared 6.6 percent, the biggest gain since June 6, to $97.16 a barrel.

Sumitomo Metal Mining jumped 3.5 percent to 1,081 yen, making it the biggest winner on the Nikkei.

Nikkei futures expiring in December retreated 3.4 percent to 11,330 in Osaka and slumped 3.1 percent to 11,330 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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