Turkish stocks fell sharply upon a foreign investment bank's fire sales

The main Istanbul Stock Exchange National-100 Index, which plunged 5.3 percent on Monday, extended its losses to close 3.8 percent lower on the day at 33,736.35 points on Tuesday.

 

U.S. STOCKS ALSO PLUNGE

U.S. stocks also plunged at the open and government debt rallied in a renewed bid for safety on Wednesday as investors worried the U.S. government's rescue of insurer American International Group wouldn't be enough to stem further financial market turmoil.

 

The benchmark S&P 500 index shed more than 2 percent when U.S. equities opened though it pared some losses after. European shares, which initially got a boost from the news of government help for AIG, tracked the weak start in U.S. markets as a spike in inter-bank lending rates rattled investors who fear credit constraints.

 

U.S. Treasury bonds rallied sharply in a scramble for safe-haven investments, with the 30-year bond gaining more than one full point in price and its yield falling to about 4 percent, down from 4.08 percent late on Tuesday.

 

Investors were still on tenterhooks as volatile equity markets reflected a strong sense of unease about the health of financial markets.

 

"The government's lifeline to AIG has temporarily boosted risk appetite and we are seeing some unwinding of some of the safe-haven positions that we have seen over the past week or so," Omer Esiner, a senior currency analyst at Ruesch International in Washington told Reuters.

 

"The dollar had benefited from safe-haven capital flows into U.S. Treasuries and we are seeing a little bit of an unwinding of that. The tentative increase in risk appetite is hurting the dollar and the yen."

 

The U.S. dollar and yen fell on Wednesday as the government's rescue of AIG revived risk appetite, encouraging traders to unwind some safe-haven trades.

 

Oil and gold rebounded, in tandem with other commodities, after the $85 billion U.S. government rescue of AIG gave energy investors a bit of respite. 

 

FED'S RESCUE PLAN

The U.S. reversed its opposition to a bailout of AIG, the nation's biggest insurer by assets, after private efforts failed and the Federal Reserve concluded that "a disorderly failure of AIG could add to already significant levels of financial market fragility," according to a Fed statement late Tuesday.

 

The agreement, supported by the Treasury Department, may avoid wider chaos in world markets that threatened to engulf more financial companies. Industry losses could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets.

  

AIG's rescue calls for the Federal Reserve to lend up to $85 billion to AIG for two years in exchange for a 79.9 percent equity stake. It comes just two days after U.S. authorities refused to bail out investment bank Lehman Brothers Holdings Inc, forcing it into bankruptcy court despite pleas from Wall Street's chiefs.

 

AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, making the current rate equal to about 11.4 percent. That gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly.

  

Around the time the AIG deal was announced, British bank Barclays Plc gave Wall Street another boost: It agreed to buy several parts of Lehman, the Wall Street investment bank that went bankrupt on Monday, for $1.75 billion.