U.S. Auto Industry Bailout Getting Close As World's Economy Worsens

NEW YORK December 9, 2008; Daniel Trotta writing for Reuters reported that Washington stepped closer to bailing out U.S. automakers on Tuesday in a bid to stabilize the economy as neighboring Canada declared itself in recession and Japan said GDP shrank more than previously believed.

The White House and Congress were negotiating terms for emergency loans that could give taxpayers an equity stake in companies that once symbolized the triumph of the free market.

Now the government is considering taking warrants on shares of the automakers equal to at least 20 percent of the value of any federal loans they receive, though the overall plan faced some opposition from Senate Republicans.

As government extended its reach into the private sector, bearish news piled up around the world with the economy still beset by a credit crunch and economic slowdown.

Investors had so little risk tolerance in a U.S. Treasury auction on Tuesday that rates for four-week paper hit zero.

While some institutional investors debated whether equities could be near their cyclical bottom, one fund manager said U.S. stocks in the spring could retest the 11-year lows that were hit in November as euphoria over a new U.S. president and a likely stimulus package wear off.

"The reality of it is, come springtime this economy is not going to perk up the way we thought it was," Tom Atteberry, a partner at First Pacific Advisors, told the Reuters Investment Outlook Summit 2009.

But influential Wall Street investor Jim O'Shaughnessy told the summit stocks were at their most compelling prices since 1982 because investors were pricing in a depression while the economy is only in a recession.

Canada's central bank cut its benchmark interest rate more aggressively than most economists expected, bringing it to its lowest level in 50 years and declaring for the first time that the Canadian economy is in recession.

Japan's economy sank deeper into recession in the third quarter than initially estimated, shrinking 0.5 percent and reinforcing fears that the world's second-largest economy is facing its longest contraction ever.

The Yomiuri newspaper said Japan was considering spending $216 billion on new stimulus measures, or 3.6 percent of gross domestic product, to boost its economy.

In China, a central bank adviser said November exports might be down from a year earlier, and growth in industrial output could have slowed markedly.

"HORROR STORY"

British industrial output fell at its sharpest pace in nearly six years in October, and revisions to previous months' data suggested the economy contracted more in the third quarter than initially thought.

"Industrial production data, particularly manufacturing output, is a horror story. We've seen a number of sharp declines in recent months and if anything the pace of contraction appears to be worsening," said Philip Shaw, an economist at Investec.

France reported a record trade deficit that reflected a Europe-wide slowdown. In Germany, the continent's engine, a survey of sentiment suggested the economy might start to emerge from recession in mid-2009 at the earliest.

Pending sales of existing U.S. homes fell by a smaller-than-expected margin in October, according to the National Association of Realtors Pending Home Sales Index.

But optimism on the troubled sector may be premature, said Carl Lantz, rate strategist at Credit Suisse. "It's too early to get excited about a bottom in housing," Lantz said. "People have been trying to do that for a long time. We still know there is plenty of inventory."

A retailers' report said December sales at U.S. retail chains will be weaker than expected.

Japanese electronics maker Sony Corp said it will cut 16,000 jobs, curb investment and pull out of businesses to save $1.1 billion a year.

"The number sounds big, but this staff reduction won't be enough," said Katsuhiko Mori, fund manager at Daiwa SB.

Reporting by Reuters bureaus worldwide; Editing by Steve Orlofsky