City braced for meltdown

Experts suggested billions could be wiped off the value of blue chip stocks in London - adding to the £64 billion loss yesterday.

Traders will be watching intently when US president George Bush makes a statement on the rescue plan later today.

In the US, the fall-out from the House of Representatives' refusal to back the rescue plan was immediately followed by a drop of nearly 5% in the Dow Jones Industrial Average.

The drop was followed by sharp falls in all Asian markets immediately after opening.

Japan's benchmark Nikkei 225 index saw a tumble of 544 points, or 4.6%, to 11,199.07. Top stocks like Sony suffered, down 6.8%, and Toyota down 4.6%.

Traders in Hong Kong saw a nosedive of 3.6% in the Hang Seng index.

Taiwan's key index fell by 6.1% despite pleas by vice premier Paul Chiu for investor confidence in the island's economy.

In Australia, South Korea and the Philippines the news was no better with all markets dropping sharply.

Australian prime minister Kevin Rudd said of the turmoil: "This is a bad development" and urged US politicians to try again to reach a deal.

"The attitude that we will adopt, and I believe other friends and allies of the US will adopt, is to urge the US Congress to pass this or a similar measure when it is re-presented to the Congress later this week," he said.

Within half an hour of opening Australia's benchmark S&P/ASX-200 had fallen more than 5.3%. Later in the day it recouped some of those losses and was down 3.7% by the afternoon trading session.

After the turbulence in the Asian markets the dollar dropped against the yen and was trading at 104.14 yen in Asia today.

The turbulent trading expected today in London comes after a day in which the FTSE plunged 269.7 points to 4818.8 - a 5.3% fall and its lowest close since April 2005.

Responding to last night's vote in the US, Justin Urquhart Stewart, of Seven Investment Management, said: "This is not good news at all. Although 700 billion dollars wouldn't have solved the problem, it would have helped. Things could get nasty."

David Buik, of Cantor Index, said: "They will have to go back and renegotiate. To have no agreement is a non-option, it is just ridiculous. Those who have have voted No have engaged their backsides rather than their brains."

He said renegotiations could take up to a week, but would have to come.

"The FTSE could drop a further 200 points today if nothing happens. But whatever happens, something has to be renegotiated," Mr Buik said.

Uncertainty over the effectiveness of the proposed rescue package had already hit the FTSE 100 Index.

But it was not the only factor in the 250-plus point fall in yesterday's trading.

The index also suffered from the pound experiencing its biggest one-day loss in 15 years amid the stock market turmoil.

News of the co-ordinated European governmental rescue of Belgium's Fortis bank fuelled concerns of contagion across Europe.

Bank of England figures revealing that mortgage lending plummeted by 95% during August also added to the Footsie bloodbath.

The US plan, which needed approval from both houses of Congress, would have given the administration broad power to use taxpayers' money to purchase billions of home mortgage-related assets held by cash-starved financial firms.

David Jones, chief market strategist at IG Index, said government actions were being seen merely as "sticking plasters" for an ever deepening crisis.

"Recent events would seem to confirm that markets are too big to be swayed from their path by any one organisation - whether it is government or corporate," he said.

"The worry is still what is unknown and yet to come out of the financial sector."

European markets were shaken badly by the Fortis deal, which marked the largest bail-out of a European financial institution so far.

The governments of Belgium, Luxembourg and the
Netherlands combined forces to pump in 11.2 billion euros (£8.9 billion) cash to help prop up Fortis.

In London, Royal Bank of Scotland suffered a 13% drop as it emerged that Fortis must now sell its stake in ABN, bought as part of the near £50 billion takeover led by RBS last year.

Fortis, which is the UK's third largest private car insurer, paid 24 billion euros (£19 billion) for its holding in October last year, and said before Sunday's bail-out that it needed to raise around five billion euro (£3.9 billion) in cash to meet the costs of integrating ABN's Dutch retail operations.

Fortis previously insisted it could meet that shortfall by selling other assets.

Meanwhile, the Icelandic government said it was taking control of the struggling Glitnir bank, marking the first major banking nationalisation in the country since the start of the credit crisis.

The worries for the wider European banking sector compounded caution among investors over the US government plans to help buy "toxic" bank debts.