Asia markets breathe easy post $85bn AIG rescue

17 September 2008 07:24  [Source: ICIS news]

By Bohan Loh

SINGAPORE (ICIS news)--Asian market players are breathing a deep sigh of relief as news of the US Federal Reserve’s $85bn (€60.35bn) rescue package for global insurer American International Group (AIG), came in on Wednesday.

With $1,100bn in assets and 74m clients in 130 countries, Asia had a significant exposure to the Fortune 500 firm.

Coming just after banking giant Lehman Brothers collapsed under the weight of a $613bn debt, the Federal Reserve's move on Tuesday was a bid to prevent further collapse of global financial markets and shore up confidence.

"A disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance," the Federal Reserve said in a statement.

"The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy," it added.

Economists and analysts contacted by ICIS news were not surprised by the Federal Reserve’s move to rescue the international insurer which was on the verge of filing for bankruptcy protection.

"The Federal Reserve’s move is obviously to prevent a deeper recession in the economy. If AIG were to fall to bankruptcy, the global economy might be ripped," Arden Dai, an analyst with Frost and Sullivan Shanghai, said.

"Lehman Brothers had an asset base of about $639bn and its collapse sent regional markets down 10% in a mere two days. I cannot fathom what could happen if a company with a $1.1 trillion dollar balance sheet topples," said Song Seng Wong, regional economist at CIMB-GK Research.

Song predicted further "unpleasant news" as the US economy continued to reel from the sub-prime mortgage crisis and expected investor confidence to wane further amid uncertainty.

"They (the Federal Reserve) might have stabilised a rocky boat at the moment but the rockiness may come back as people realise the severity of the slowdown," he added.

"I think it certainly provides a transitory calm to the market," said Thomas Lam, an analyst with United Overseas Bank (UOB) Economic-Treasury Research

"I think although the Fed provided some sort of calming effect, it might be more temporary than permanent, simply because there is quite a bit of unknown out there," Lam added.

He also saw risks of a US recession being heightened amid what was one of the most radical government interventions in private businesses.

Meanwhile, most regional indexes had given up early gains at 12:00 noon Singapore time (04:00 GMT).

Singapore’s Straits Times Index was trading down 14.04 points to 2,447.39 while Japan’s Nikkei 225 gained 1.48%, or 171.11 points, to 11,781.43.

The Shanghai Stock Exchange 180 was down 2.45% to 4400.55, while Hong Kong’s Hang Seng Index shed 1.12%, or 204.76 points, to 18,095.85.

Among petrochemical stocks, Sinopec and PetroChina were down 2.69% and 4.23% respectively in Hong Kong while Asahi Kasei and Mitsubishi Chemical in Japan were down 0.64% and 0.17%.

($1 = €0.71)

Judith Wang and Pearl Bantillo contributed to this article
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By: Bohan Loh
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