TOPWRAP 7-Auto plan awaited as E.Europe worries hit markets

Published: 17 Feb 2009 18:10:54 PST

* Eastern Europe exposes Western banks

* U.S. automakers scramble to submit survival plans

* Obama to sign $787 billion stimulus package

* Texas billionaire Stanford charged with fraud

* Japan finance minister replaced

NEW YORK, Feb 17 - Worries that Eastern Europe's hard-hit economies will drag down Western banks undercut global markets on Tuesday, and U.S. investors braced as two of Detroit's Big Three automakers scrambled to submit restructuring plans.

U.S. President Barack Obama prepared to sign a $787 billion economic stimulus plan into law, but questions over the effect emerging markets will have on the global downturn dominated market sentiment.

Elsewhere, a Texas billionaire was charged with "massive ongoing fraud" and Japan's finance minister resigned under suspicion he was drunk at a G7 press conference, further eroding public confidence in governments and institutions.

With concerns growing over the investments Western banks made in Eastern Europe, stocks tumbled across the board. The Dow fell 3.5 percent, an index of leading European shares closed down 2.5 percent, and Japan's Nikkei lost 1.4 percent. Oil prices fell more than 7 percent.

"Risk aversion is still the name of the game," said Bob Maes, fixed-income strategist at KBC in Brussels.

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.

Standard & Poor's told Reuters it could review ratings on European banks following the Moody's report, which highlighted the investments Italian, Austrian and French banks made in Eastern Europe.

U.S. Secretary of State Hillary Clinton, visiting Japan, called for coordinated action to revive the global economy, crippled after a collapse in the U.S. housing market and a crush of defaults on subprime mortgages spawned a credit crunch last year.

German Chancellor Angela Merkel said again that banks should not be absolved of their responsibilities and the state should not take on bad assets.

AWAITING SURVIVAL PLANS

Obama was to sign into law a stimulus package approved by Congress last week.

In addition, the United States hopes a $17.4 billion bailout will help its badly bruised auto industry.

General Motors Corp and Chrysler LLC, majority-owned by Cerberus Capital, have been asked to submit survival plans to justify the loans, and were due to present measures to aggressively cut costs later on Tuesday.

But GM was not expected to have secured deals with bondholders and the United Auto Workers union to cut debt and labor costs, and was still talking with the UAW.

"Investors are very skeptical that the automakers will be able to come up with a viable plan to allow them to return to profitability without going through some some sort of bankruptcy reorganization," said Michael Sheldon, chief market strategist, RDM Financial, Westport, Connecticut.

"If that were to occur, it would probably be a very messy and lengthy process which would further undermine confidence in the fragile economy," he said.

As the automakers scrambled to finish details on their plans, the Canadian prime minister said he is confident GM will remain in Canada and a labor leader said GM is trying to preserve plants in Germany.

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

U.S. banks and energy stocks led North American equities lower as investors questioned the 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.

"More negativity from Europe certainly didn't help," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. "You're seeing a basic flight to safety out of equities into fixed income and gold."

U.S. Treasury debt prices rallied on Tuesday, while gold was near a seven-month high.

Also on Tuesday, U.S. authorities charged Texas billionaire Allen Stanford and three of his companies with "massive ongoing fraud." Analysts said the news could further darken sentiment.

"If this kind of thing is catching the sophisticated investors and you're seeing the authorities and the regulators not being able to control these things, you think, 'Maybe I'm going to stay in things that are safe,'" said Kurt Brunner, portfolio manager at the Swarthmore Group in Philadelphia:

In Asia, Japan has suffered a sharper contraction than other major economies because of its heavy dependence on exports combined with persistently soft domestic demand.

Japanese Prime Minister Taro Aso named Economics Minister Kaoru Yosano as finance minister after Shoichi Nakagawa resigned. Nakagawa was forced to deny he was drunk at a G7 news conference in Rome.