NEW YORK — The world's financial markets face an uncertain and possibly volatile week as investors await details about how the Treasury will implement the government's financial rescue package — and watch for any further fallout from the credit crisis around the globe.
The markets have switched their focus to the world economy now that the $700 billion bailout plan has become law. And there's reason for their concerns: Governments across Europe are rushing to prop up failing banks. On Sunday, Germany said it would follow suit with Ireland and Greece in guaranteeing all private bank accounts.
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Those steps are the latest sign that the troubles of U.S. banks, which have all but paralyzed credit markets, are affecting the financial systems of other countries. Banks' hesitation to lend to one another and to many businesses and individuals is the consequence of the bad mortgage debt that the financial rescue is supposed to sweep up. But it's still unclear how quickly financial institutions will be able to hand that debt to the U.S. government and convince the markets they are healthy again.
Wall Street looked to continue the volatility of last week when trading resumes Monday. Stock index futures declined by more than 1 percent late Sunday, pointing to a lower open.
Doug Roberts, chief investment strategist at ChannelCapitalResearch.com, said the steps taken by governments abroad are welcome because a broad response, not simply the U.S. bailout, is needed to help steady the world's financial system.
"A lot of the actions that are occurring overseas are good," he said. "What you really need now is stabilization, and that really comes from the government."
But Roberts said he thinks bringing lasting calm to credit markets and financial institutions will take longer than many observers predict.
"This is much more expansive than anybody is assuming," said Roberts. "I think that this whole bailout bill is the first step in a series of steps."
With so many unknowns, it's likely to be a choppy ride on Wall Street for some time as the Treasury Department starts flexing the new powers granted by the financial rescue, which President Bush signed into law Friday shortly after the House passed a sweetened bill on the second try.
"You're going to have a lot of volatility, and we're going to get a whole lot of nowhere in the next few weeks," said Frank Ingarra, co-portfolio manager at Hennessy Funds.
Investors will be straining to see how the Treasury goes about purchasing banks' debt and what prices the unwanted assets might fetch. If the government pays too little, it risks sending more banks into failure by depleting their asset bases. But paying too much could artificially strengthen banks that made bad lending decisions.
"I think it's a little bit more 'show me' than 'tell me' here," Ingarra said, referring to investors' desire to see proof that the debt causing the lockup in the credit markets is being absorbed.
Enfeebled by huge losses on risky home loans, the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period.
The government's commitment to buy bad debts from ailing banks is likely to save some institutions that would have otherwise died, but analysts doubt it will be enough to avert a major shakeout.
"It will help, but it's not going to be the saving grace" because a lot of banks are holding construction loans and other types of deteriorating assets that the government won't take off their books, predicted Stanford Financial analyst Jaret Seiberg. He expects more than 100 banks nationwide to fail next year.