World financial news

WASHINGTON – Rushing to rescue Citigroup, the U.S. government agreed to shoulder hundreds of billions of possible losses at the stricken bank and to plow a fresh $20 billion into the company.

Regulators hope the dramatic action will bolster badly shaken confidence in the once mighty banking giant as well as the U.S. financial system.

That goal so far has been elusive despite a flurry of government interventions to battle the worst global crisis since the 1930s.

Wall Street investors reacted enthusiastically today. The Dow Jones industrials shot up about 308 points in late morning trading. Stock markets in Britain and Germany also gained ground. Citigroup shares (NYSE: C) themselves climbed 61.3 per cent to US$6.08 on the New York Stock Exchange.

"If they didn't help, the damage would be beyond imagination," said Teck-Kin Suan, economist at United Overseas Bank in Singapore.

The action, announced late Sunday by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already fragile financial system and the U.S. economy.

The three agencies said in a joint statement that "with these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

They said they will continue to use "all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks."

President George W. Bush held open the prospect today of similar arrangements should other companies falter. "If need be, we will make these kind of decisions to safeguard our financial system in the future," Bush said.

Analysts said a Citigroup failure would have seized up still fragile lending markets and caused untold losses among institutions holding debt and financial products backed by the company.

"It would create chaos," said Winson Fong, managing director at SG Asset Management in Hong Kong, which oversees about $3 billion in equities in Asia. "Simply put, you couldn't borrow or lend for a while. This is a nightmare scenario."

The bold move is the latest in a string of high-profile government bailout efforts. The Fed in March provided financial backing to JPMorgan Chase's buyout of ailing Bear Stearns. Six months later, the government was forced to take over mortgage giants Fannie Mae and Freddie Mac and throw a financial lifeline – which was recently rejiggered – to insurer American International Group.

Critics worry the actions could put billions of taxpayers' dollars in jeopardy and encourage financial companies to take excessive risk on the belief that the government will bail them out of their messes.

The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief also participated. Bush said today he consulted with Obama on the Citigroup rescue.

Vikram Pandit, Citi's chief executive, welcomed the action. "We appreciate the tremendous effort by the government to assure market stability," he said in a statement issued early today.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package business card printing. The capital infusion follows an earlier one – of $25 billion – in Citigroup in which the government also received an ownership stake.

As part of the plan, Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

Under the loss-sharing arrangement, Citigroup Inc. will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 per cent of the remaining losses, and Citigroup 10 per cent. Money from the $700 billion bailout and funds from the FDIC would cover the government's portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.

In exchange for the guarantees, the government will get $7 billion in preferred shares of Citigroup. In addition, Citi said it will issue warrants to the U.S. Treasury and the FDIC for about 254 million shares of the company's common stock at a strike price of $10.61.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than one cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

Importantly, the agreement calls on Citigroup to take steps to help distressed homeowners.

Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.

The IndyMac plan also was used as a model for a new program by Fannie Mae and Freddie Mac and for two other failed thrifts taken over by the government on Friday.

Citigroup has seen its shares lose 60 per cent of their value in the last week, reflecting a crisis of confidence among skittish investors. They are worried all the risky debt on Citigroup's balance sheet will turn into losses as the economy worsens and the markets stay turbulent – losses that could be nearly impossible to reverse.

Citigroup is such a large, interconnected player in the financial system that it is seen by Washington policymakers as too big to fail. The company, with some 200 million customers, has operations stretching around the globe in more than 100 countries.

Analysts consider Citigroup the most vulnerable among the major U.S. banks – especially after it failed to nab Wachovia Corp., which was bought instead by Wells Fargo & Co. That was a missed opportunity for Citi to gets its hands on much-needed U.S. deposits that would bolster its cash position.

Citigroup was especially hard hit by the meltdown in risky, subprime mortgages made to people with tarnished credit or low incomes. Foreclosures on those mortgages spiked, leaving Citi and other financial companies wracking up huge losses on the soured investments. The company has failed to turn a profit during the past four quarters and has announced plans to slash thousands of jobs.

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U.S. car giant General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) announced a two-month shutdown at its Thai plant on Thursday, the latest move by global automakers seeking to slash costs in the face of weak sales and deepening economic gloom.

GM Thailand said its 130,000-unit-a-year factory at Rayong would close for two months from mid-December, and it planned to cut 258 jobs at the plant 150 kms (90 miles) southeast of Bangkok.

“We plan to close the plant to help control costs and our 2,000 workers will be paid 75 percent of their monthly salary during the shutdown,” director of public relations Chartchai Suwanasevok told Reuters, without giving details on the production impact.

The plant produced about 100,000 pickup trucks, SUVs, sedans and compact cars for Thailand, Southeast Asia and Australia in 2007, representing only a fraction of the Detroit-based firm’s global output of 9.28 million vehicles last year.

But the shutdown was the latest measure taken by an international auto firm to stave off the impact of a massive slowdown in sales due to the global economic slowdown.

General Motors and its U.S. rivals, Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz) and Chrysler LLC, are seeking a $25 billion U.S. government bailout to avoid bankruptcy, but the prospects for a rescue package this week appeared dim.

Last week, GM’s South Korean unit said it would halt production for two weeks, due to sluggish demand cash advance in one hour.

The company had no plans to halt production at its vehicle manufacturing ventures in China, a spokesman said, despite slowing growth in the world’s second-largest auto market.

TOYOTA CUTS TOO

Japanese automakers, many of which had enjoyed steady to rapid growth in recent years, are also scaling back production and workforce in many markets due to a sharp, broad-based slide in vehicle sales.

Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) also planned a cutback at its 200,000-unit-a-year plant in Thailand, a company spokeswoman said, without giving details.

Japan’s top automaker is also seeking early retirement for 340 of its 1,850 temporary workers at the Gateway plant, which builds the Camry, Corolla, Yaris and other cars for Thailand and markets in the region.

Toyota is the top brand in Thailand, but its sales dropped 21 percent in October compared to a year ago, worse than the market’s 15 percent slide due to a slowing economy and a long-running political crisis eroding consumer confidence.

“There are signs of a slowdown not just in Thailand, but in the markets of export destinations,” the spokeswoman said.

Most of the world’s major automakers have plants in Thailand, which produced 1.29 million vehicles last year, of which 690,000 units were exported worldwide. 

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Amtrak says Chief Executive Alex Kummant is resigning after about two years in the top job.

Amtrak spokesman Cliff Black says Kummant’s resignation is effective immediately.

Chairwoman Donna McLean thanked Kummant for his service in a statement released Friday. She says the passenger railroad has experienced strong ridership and revenue growth under his leadership freecreditscore.

Kummant is also credited with overseeing the completion of labor agreements with all of Amtrak’s union employees.

Kummant says he will help with a transition to new leadership. 

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As the bear market becomes situation normal, successful investing has become more a matter of "my stocks are down less than your stocks." But should it be? The old adage is that any fool can make money in a bull market and we saw that writ large over the past couple of years. Making money in today’s market takes real skill. The question really then is what kind of stocks could possibly go up in this market?

Well, first of all not many. Or at least not many over the past couple of months. Only about 2% of U.S. stocks are trading above their 200-day moving average, which in plain English means that some 98% of all stocks sell for below their average trading price year-to-date. (Next to none are trading at their 52-week highs, by the way.) So stocks are beaten down, which means they could be a bargain, but they could also fall lower. The frustrating point is that SOME stocks will go up over the next year; we just don’t know which ones.

To help narrow down the search, I’ve come up with some investing brain food. Themes that might help you find that select group of stocks that go up.

BE OBAMA-FRIENDLY: A recent Bloomberg article tapped into bullishness about the president-elect’s position on compressed natural gas as a source of automobile fuel. That moved stocks like Chesapeake Energy (CHK, Fortune 500), Devon Energy (DVN, Fortune 500) and XTO Energy (XTO, Fortune 500).

TAKEOVER BAIT: There will still be mergers. In fact bear markets can spur this activity. In tech, giants like Oracle (ORCL, Fortune 500) and Cisco (CSCO, Fortune 500) are known to be acquisitive during such times - i.e. take a look at smaller software and networking companies. (And don’t forget Yahoo (YHOO, Fortune 500)!) Banks will also be bought out, but that is a most dangerous game. Energy too: Chesapeake (see above) has been mentioned as a takeover candidate. You didn’t want to own these stocks on the way down, but now the time may be ripe.

THEORY OF RELATIVITY: This is all about not having to run faster than the bear, just running faster than your fellow hiker. (Ouch!) Time Warner (TWX, Fortune 500) - yes my parent company - recently announced third-quarter earnings that were decidedly blah, but here’s how the AP saw it: "Time Warner 3Q profits beat expectations." And so TWX stock is up a smidge over the past ten days (I’m using that period because it includes trading days before the announcement whereby investors may have anticipated the news) while the S&P 500 and competitor Disney (DIS, Fortune 500) is down. Of course that is a small victory for long-suffering TWX shareholders, but you get my point about beating expectations.

BUYBACKS: Yes we know this can be a false promise, but with lower stock prices this strategy might actually make sense short term cash loans. An example here would be US Cellular parent Telephone and Data Systems (TDS, Fortune 500) announcing a $250 million buyback. Not huge but enough perhaps. That stock has been up recently.

DIVIDENDS ARE YOUR FRIEND: Cash is king in this environment as Fortune’s Shawn Tully recently wrote. (Why do I always confuse Shawn with Cary Grant?) I don’t think that it’s too late to buy stocks after companies announce dividend increases, by the way, because in this environment you can see investors moving more and more to dividend payers. Check out Questar (STR), Emerson Electric (EMR, Fortune 500) and even Vornado (VNO) if you can imagine.

FRUGALITY: As in look for companies that are cutting costs, or even scaling down. But be careful here. Look at this story: "Investors send Genco Shipping shares higher after it drops orders for six ships, freeing up cash." Only problem is the market changed its mind about the move and soon sent Genco southbound. (Oh. Never mind.)

EARNINGS: Remember some universal truths still apply. John Eade, who is the CEO and director of research at Argus Research, says this: "What makes stocks go up, consistently across the board, in any kind of market, are growing earnings. We’ve been in a market environment for five quarters where overall, corporate earnings have been falling and [we’re] looking ahead toward lower earnings in 2009."

Is there any hope John? "The areas where our analysts are actually seeing some strength would be healthcare. They have been increasing their estimates for pharmaceuticals, biotech and medical devices." What names? Eade says companies like Baxter International (BAX, Fortune 500), Abbott Labs (ABT, Fortune 500), Schering-Plough (SGP, Fortune 500), and Johnson & Johnson (JNJ, Fortune 500). The other area is in for-profit education. "I guess people are losing their jobs and thinking it’s going to be a while before they get a job. They’re going back to school and taking courses at traditional colleges and schools but also these for-profit universities." Here Eade points to ITT Educational Services (ESI) and Corinthian Colleges (COCO). Makes sense, right?

Again, some stocks will be winners. Finding them is the trick. Let’s hope by this time next year things are looking up.

Has the stock market turmoil made you nervous about how to invest now? Ask us your investing question and we’ll answer it in our next Investor Daily. E-mail Fortune.  

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The board of troubled insurer American International Group was nearing approval late on Sunday of a revised U.S. bailout to replace a previous $85 billion rescue, a person familiar with the matter said.

Under the revised rescue plan, the U.S. government is expected to buy $40 billion of AIG preferred shares through Treasury’s Troubled Asset Relief Program (TARP) and greatly ease lending terms, sources said.

The government is also expected to set up two separate vehicles that will buy securities worth billions of dollars underlying the insurer’s credit default swaps and backstop a securities lending portfolio, the sources said.

AIG plans to announce the new plan early on Monday, when it reports third-quarter results, sources said.

“It’s not done until it’s done, but this is where this is headed,” said one person familiar with the details under discussion.

The government gave AIG, once the world’s largest insurer by market value, $85 billion in bailout financing in September after counterparties and rating downgrades forced it to post large amounts of collateral for credit derivatives positions.

It later offered additional financing to bring the support extended to AIG up to $123 billion.

The new package is designed to help staunch the cash drain on the insurer and give the company more breathing room for its planned sale of assets to repay the government.

It will leave the U Faxless pay advances.S. exposed to billions of dollars in investments. The government will still have a nearly 80 percent equity stake in AIG after the revisions.

Under the plan, the emergency $85 billion two-year credit facility extended to the insurer on September 16 will be replaced by a $60 billion loan with a five-year term, according to these people.

The new facility is expected to have an interest rate of 3 percent over LIBOR, slashed from the earlier rate of 8.5 percent over the benchmark interest rate, the sources said.

The government’s preferred shares are to carry a dividend of 10 percent, one of the sources said.

A vehicle for holdings tied to AIG’s credit default swaps will be capitalized with $30 billion in federal funds and $5 billion from the insurer to buy underlying securities with a face value of $70 billion, said one person.

Both sides will share any proceeds if market values improve leading to gains on these holdings, but the U.S. would reap more, a person said.

The second vehicle, for securities lending, will be capitalized by the government with about $20 billion and $1 billion from AIG to buy residential mortgage-backed securities for 50 cents on the dollar, and shut down a $37.8 billion federal credit facility put in place last month. 

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European shares lost momentum following a dismal U.S. jobs report, but Asian markets closed higher Friday as investors responded to the latest round of rate cuts from central banks around the world.

In the U.S., the Labor Department said the country lost nearly 1.2 million jobs though October and the unemployment rate hit a 14-year high of 6.5%.

European stocks lost their gains following the jobs report. Britain’s FTSE-100 was still up by nearly 1%, but the CAC-40 in France and Germany’s DAX declined by less than 1%.

Recession fears and worries about corporate profits pummeled markets worldwide on Thursday. On Friday before the open of the U.S. stock market, investors were greeted with Ford Motor’s (F, Fortune 500) $3 billion operating loss for the third quarter.

South Korea’s main stock index rebounded from a 4.9% fall to close 3.9% higher after the country’s central bank cut its key interest rate for the third time in a month.

"The growth of the Korean economy is expected to slow sharply as the pace of export growth is markedly falling and domestic demand remains sluggish," Lee Seong-tae, the governor of the Bank of Korea, said, according to the Yonhap news agency cash advance no faxing.

The move, designed to boost the economy by lowering the cost of borrowing money, came on the heels of rate cuts made by the European Central Bank and the Bank of England on Thursday.

Elsewhere in Asia, Japan’s Nikkei Index dropped more than 6% in early trading Friday, but cut its losses to finish down 3.6%. Hong Kong’s Hang Seng index added 3.3%.

U.S. markets have slumped about 9% since Tuesday’s elections as investors have refocused their attention on the slumping economy and prospect of a deep recession.

The Dow fell 4.9% on Thursday, while the Standard & Poor’s 500 index dropped 5% and the Nasdaq composite declined by 4.3%.

"Everything is so dismal right now, It’s just an endless flow of bad news and no one wants to buy," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

CNN Wires contributed to this report. 

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The principal risk posed by the global financial crisis has moved from a credit crunch set off by subprime mortgages to economic slowdown, the finance ministers of the 21-member Asia-Pacific Economic Cooperation said.

APEC countries, which account for 60 percent of the world's gross domestic product, will respond “quickly'' to the changing crisis by taking the necessary steps to support economic activity, the ministers said in a statement released today in Trujillo, Peru, where the group's finance ministers are meeting.

The International Monetary Fund forecast global economic growth will slow to 2.2 percent next year from an expected 3.7 percent in 2008. Policy makers around the world are cutting rates, pumping cash into the banking system and stepping up public spending in a bid to limit the affects of the crisis.

“The focus of global financial market risk now appears to have shifted from losses due to U.S. subprime mortgage defaults and the associated seizure in credit markets, to the adverse impact from a more generalized slowdown in global economic activity,'' the ministers said in their joint statement payday advance loan.

The 21 member-economies plan to keep their public spending unchanged next year even if slower economic growth leads to a reduction on revenues, Luis Valdivieso, Peru's finance minister, said. Peru is willing to narrow its budget surplus to help sustain economic growth, while other APEC economies may need to run “small deficits'' in a bid to spur expansion, he said.

“Fortunately the APEC region has a relatively strong position to face these difficulties,'' Valdivieso said. “Those needing to run small deficits have the ability to borrow and finance them.''

The biggest member economies in APEC are U.S., Japan, and China. Other members are Australia, Brunei, Canada, Chile, Hong Kong, Indonesia, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, and Vietnam.

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The election of Democratic Sen. Barack Obama to the presidency should be a boon to natural gas producers, but the forecast is turning dark for oil and coal industries already coping with falling prices.

The potential regulation of carbon dioxide emissions and the threat of a “windfall profits” tax on oil majors such as Exxon Mobil, Chevron Corp and ConocoPhillips have been two major themes of the Obama campaign. Both moves could erode the massive profits those companies have posted on the back of high crude oil prices, industry experts said.

High oil prices usually benefit companies such as Exxon, which last week set a U.S. record by posting quarterly operating profit of $13.4 billion, but Obama’s proposals have prompted some analysts to warn investors away from the sector.

“We believe that some of the Obama policies, such as a windfall tax on energy and full CO2 auctions, may lead to a negative result for the industry if (he is) elected,” analysts at Sanford Bernstein said in a pre-election note to investors.

Obama, who became the president-elect in Tuesday’s vote, campaigned on a platform of increasing fuel efficiency in the U.S. auto fleet and reducing crude oil imports that make up about three-quarters of the nation’s supply.

The Illinois senator, like his vanquished Republican rival Sen. John McCain, supports a trading system that would set prices for companies to emit carbon dioxide. That policy would hurt Massey Energy, Peabody Energy, Arch Coal and other producers of coal, long one of the cheapest forms of energy in the United States and the source of half the nation’s electricity.

That could be an opening for the natural gas industry to boost its 20 percent share in the nation’s power generation portfolio and even move into the automobile markets quick pay day loan.

As a result, natural gas producers like Chesapeake Energy had viewed an Obama presidency with optimism.

“This administration will be very favorably inclined to try to do something about introducing natural gas into the transportation network in a more aggressive way than what has happened in the past four to eight years,” Chesapeake Chief Executive Aubrey McClendon told analysts last week.

While the major oil companies also produce substantial amounts of natural gas, others, such as Devon Energy, Apache Corp and Canada’s EnCana Corp, are more focused on the fuel.

Although substantial hurdles stand in the way of boosting the role of natural gas as an automobile fuel, its emissions are half those of crude oil and coal.

Obama has endorsed cleaner coal technology that would remove pollutants such as carbon dioxide and allow them to be stored, but that technology has not been tested on a commercial scale, and widespread deployment remains years away. Congress earlier this year canceled a planned test power station because of soaring costs to build it.

LOWER OIL PRICES, NEW ATTITUDE?

Obama, like many other Democrats, initially opposed opening new areas for drilling, but softened his stance to support some moves in that direction as crude oil raced to a record above $147 a barrel and retail gasoline to more than $4 per gallon.

But a sharp pullback that has sliced more than 50 percent from the price of oil since July could move the new president away from that pledge. 

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Mohammed El Rhazi, a worker at mattress-maker Dunlopillo, calls the credit crisis the “new plague'' in his impoverished Paris suburb of Mantes-la-Jolie, after riots tore through there in 2005.

“French suburbs are hit by this global crisis like everyone else,'' said the 43-year-old father of four, whose company is under court protection since its parent faced a cash shortage. “The difference is that our suburbs carry scars. The crisis comes on top of an open wound.''

Three years ago this month, young people in poor French neighborhoods rioted for 21 days, burning cars and destroying property. The violence in those areas — with large immigrant populations packed into concrete high-rise buildings and youth unemployment of about 40 percent — prompted President Nicolas Sarkozy to create a plan to revive the suburbs, known as “banlieues'' in French.

Now, as his government focuses on containing a banking crisis and countering a possible recession, the plan is taking a backseat. Without what Sarkozy once called a suburban “Marshall Plan'' — similar in spirit to the effort that rebuilt Europe after World War II — the financial turmoil will hit these areas the hardest and may make an already fragile situation worse, social analysts and businessmen said.

“People from the wealthy Neuilly suburb are less likely than the ones in Mantes or Clichy to lose jobs,'' said Aziz Senni, 31, who created ATA SA, a minicab company in Mantes, and heads a group trying to help boost employment. “Suburban workers live on construction, small services and temporary jobs, and these are the first ones to go.''

Auto-Plant Layoffs

PSA Peugeot Citroen, Europe's second-biggest carmaker, cut 700 temporary jobs at its Poissy plant in September. Many of the now-unemployed workers live 30 kilometers (19 miles) from there, in Mantes. Renault SA's Flins factory, which produces the Clio 3 car, said it may soon lay off assembly-line workers, most bussed in daily from Mantes and Les Mureaux, another suburb.

Signs of frustration are already evident. Luc Besson's movie-production company, Europacorp SA, was forced last month to cancel filming of “From Paris With Love,'' starring John Travolta, in the Paris suburb of Montfermeil after youths torched its cars and threatened the crew.

“It really saddens me,'' Besson, the director of such films as “The Big Blue,'' told Le Parisien. “We created 200 jobs. The problem always comes with the 201st person, who says `Why my brother, my cousin? And I, I get nothing?'''

November Rampage

Such hostility has largely been contained. Still, rioters in Villiers-le-Bel, north of Paris, went on a rampage in November for a few nights, this time with guns. Things are “much more violent than in 2005,'' Patrick Ribeiro, head of the Synergie Officiers police union, said at the time bad credit cash loan. “The youths are shooting at us with handguns and hunting rifles.''

The 2005 clashes started after two boys in the Paris suburb of Clichy-sous-Bois were electrocuted in a power substation where they were hiding from the police. About 10,000 cars were burned across France and damages reached 200 million euros ($255 million).

In the three years since then, “nothing was really done to help the suburbs become strong enough to face the kind of tsunami arriving now,'' Senni said.

`National Priority'

When Sarkozy, who was elected president in May 2007, presented his “Suburb Hope'' plan in February, he called it a “national priority'' that would “break intellectual, cultural, social and psychological ghettoes,'' earmarking 1 billion euros for the program.

Forty-eight companies — including road builder Eiffage SA; Areva SA, the world's biggest builder of nuclear reactors; and Total SA, France's biggest oil company — pledged to create 40,000 jobs by 2010. About 11,800 have been generated so far.

Now, “the target does not seem very realistic,'' said Laurence Boone, an economist at Barclays Capital in Paris. “This plan needs to be revised. If a company has no business in the near future, like in this crisis, why would it hire, even if it's a state-subsidized job?''

The pessimism comes after the national statistics institute said last month that France slipped into a recession in the third quarter, the first in more than 15 years. The number of job seekers rose by 42,000 in August, the most since at least 1993. The International Monetary Fund says France's economy will grow 0.2 percent in 2009.

Urgent Attention

The government has set aside 360 billion euros to boost the capital of French banks and help them step up lending. While it tries to rekindle the economy, it is underplaying concerns that suburban projects may need immediate, urgent attention.

“The tensions in the projects have existed for 30 years,'' Fadela Amara, the secretary of state for urban affairs in charge of the projects plan, told reporters Oct. 29. “It's not in 48 hours that you are going to solve the problems.''

For Dunlopillo's El Rhazi, the financial turmoil dashes any hope conditions in his neighborhood will improve soon.

“Project or no project, this crisis is bad news for all of us,'' he said. “More jobless people, more impoverished families will just make things here more unpredictable.''

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Spain's economy shrank for the first time since 1993 in the third quarter, the Bank of Spain said.

The economy contracted 0.2 percent compared with a 0.1 percent expansion in the previous quarter, the central bank said in its monthly bulletin published on its Web site today. From a year earlier, the economy grew 0.9 percent, it said. Spain's statistics institute will publish the first official estimate of economic growth on Nov. 13.

Spain may be heading for its worst recession in as many as 40 years as the global financial crisis strikes an economy already struggling with the end of a 10-year housing boom, economists at BNP Paribas say. The collapse in construction investment is fueling a surge in unemployment just as the global slowdown drags down manufacturers.

“In every area where you might hope to get growth there are impediments,'' Dominic Bryant, an economist at BNP Paribas in London, said. “What Spain needs more than anything is strong export growth. It's not going to get it from the euro region and it doesn't look like it's going to come from Latin America.''

Spain's benchmark stock index, the Ibex 35, fell 13 percent last week on concern that the global financial crisis may drag down economic growth in Latin America where Spanish companies have made a string of acquisitions. The Ibex is down 42 percent this year, while manufacturing in Spain declined for a 10th month in September as global growth slowed, a survey of purchasing managers said.

Debt Payments

Repsol YPF SA, the Spanish oil company, which has 38 percent of its assets in Argentina, Brazil and Bolivia, posted its biggest decline since it started trading in January 1990 after Argentina proposed a takeover of pension funds. The last time the government sought to tap workers' savings to help finance debt payments was in 2001, just before it stopped servicing $95 billion of obligations creditreports.

“The deterioration in the financial situation from the second half of September, after more than a year of persistent instability, set off a serious crisis of confidence and began to reach emerging economies,'' the bulletin said.

The global slowdown is exacerbating Spain's domestic adjustment as the construction industry works out a surplus of around a million unsold homes. Unemployment jumped to 11.3 percent, the highest in the European Union, as home-building activity collapsed.

Housing Slowdown

The number of building permits issued fell by two thirds in August from the previous year while the number of home sales fell by a third as rising interest rates and tighter loan conditions curbed the supply of credit.

Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain's two biggest banks, saw default rates in their home market triple in the third quarter from the year-earlier period while their loan books shrank.

With economic growth slowing across the euro region and inflation easing, the European Central Bank may reduce interest rates for a second month when it meets in Frankfurt next week, Bank of Spain governor Miguel Angel Fernandez Ordonez said yesterday.

“As regards prices, upward pressures are easing in line with the decline seen in commodity prices since the middle of July,'' the bulletin said today. “This situation, and the weakening in activity, has led to a downward revision in inflation expectations.''

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