Credit markets seek redemption

By Al Yoon and John Parry - Analysis

NEW YORK (Reuters) - Agreement by U.S. lawmakers to lift $700 billion (381.4 billion pound) in troubled debt from the financial system will relieve markets from short-term corporate debt to muddied mortgage securities, but may keep money managers on the defensive.

Legislation hammered out by Congress in a gruelling weekend session maintained the meat of the bill proposed by the U.S. Treasury a week earlier, adding strings that are not expected to erode its effectiveness, analysts said.

By focussing on illiquid debt that has crippled financial companies for a year, the plan may removed burdensome assets from bank balance sheets and make banks more willing to perform a crucial lending role as the economy heads into a tailspin.

Even though the bill goes to the core of the credit crisis, it won't fully ease shaken investors in the short-term markets.

Money market assets that theoretically carry low risk have been shaken by the failures of issuers such as American International Group, and that caution will linger with more uncertaintly swirling around big banks such as Wachovia, investors said.

"I think there will be immediate thawing of credit markets, but then the water will never quite get warm," said Tony Crescenzi, chief bond market strategist, Miller, Tabak & Co., in New York.

Lawmakers face what could be the most serious financial crisis since the Great Depression of the 1930s, with the $700 billion price tag bigger than the cost of the Iraq war and topping all International Monetary Fund lending to country borrowers since its inception after World War II.

Republicans and Democrats agreed to a blueprint over the weekend, and lawmakers are expected to vote on the bill in the coming days. The U.S. president is expected to sign it into law.