KEY POINTS:
While US politicians struggle to reach agreement over the terms, local economists remain confident Wall St's US$700 billion ($1 trillion) bailout package will go ahead as the alternative is global mayhem.
Markets around the world including the NZX see-sawed yesterday as initially positive reports about the US Treasury's plan to buy toxic mortgage debt from Wall St banks were superseded by news of growing discord among lawmakers over the plan and the latest US banking casualty.
The NZX-50 rose almost 1 per cent on opening yesterday but retreated as the day wore on to close down 1.55 per cent at 3187.58.
US lawmakers had seemed close to agreement on the plan, lifting markets.
But an emergency White House meeting between congressional leaders with US President George W. Bush "devolved into a contentious shouting match", according to a statement from the McCain campaign.
A group of House Republicans said they would not back a plan based on the approach outlined by Treasury Secretary Henry Paulson and backed by Bush and Democratic leaders.
Republican lawmakers offered an alternative plan calling for Wall St firms to purchase insurance on mortgage-backed securities and advocating tax cuts and relaxed regulations. Congressional leaders said an agreement could take until the weekend or longer.
Stephen Wright of ASB Securities said the local market "just completely lost it" after a solid start.
The main factors were the lack of resolution to the bailout and news that Washington Mutual had been "seized" by the US Government and its banking assets sold to JPMorgan Chase.
On top of all that, Wright said Fridays were now becoming generally bad days for markets around the world in the current environment.
Westpac senior economist Donna Purdue says it is important something is passed. "From our perspective, the view is it will have to pass in some way, shape or form because the risks are too great for them not to do something.
"What's the incentive from either side to not let it pass. To be held accountable for the biggest downfall in the financial markets in history? Do they really want to be held responsible for that?"
Massey University head of banking studies David Tripe said that should the deal fail, the status and solvency of the US banking sector would at least remain uncertain.
The bottom line was a failure to conclude the deal would see interest rates, including those in New Zealand remain higher for longer.
Purdue said whatever happened with the package was not going to change the fact that "risk is being repriced across the globe".
"For us that means we [NZ's banks] face a higher cost for our funds that we access from offshore. The banks will be passing that on, ultimately that means higher borrowing rates."
The response
* Sharemarkets around the world
* New Zealand: NZX-50 down 1.55 per cent at 3187.58.
* Australia: ASX-200 down 0.46 per cent, at 4904.8.
* Japan: Nikkei down 0.9 per cent at 11,893.16.
* Hong Kong: Hang Seng down 1.3 per cent at 18,682.09.
* Britain: FTSE 100 down 1.8 per cent in early trade last night.
* US: Dow Jones up 1.82 per cent, at 11,022.1.
