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Global rout in stocks continues

“There is increasing speculation that the G7 meeting could take another major step and that is to guarantee all interbank lending.”

— Marc Chandler, Brown Brothers Harriman analyst

Global stock markets spiraled ever deeper into the vortex yesterday as pressure mounted for world leaders to throw up a decisive wall to contain the worst financial inferno since the Great Depression.

Stock exchanges from Tokyo to London and New York suffered more staggering losses — adding to the turmoil for finance ministers from the G7 richest nations to discuss in Washington.

The Dow Jones Industrial Average, following seven brutal losing sessions, fell briefly below 8,000 points at the opening, or nearly 700 points, before a sharp rebound. After 15 minutes, the blue-chip index was down 152.61 points, or 1.78 percent, at 8,426.58.

London’s FTSE 100 index of leading shares nosedived 10.2 percent to as low as 3,873.99 points — the first time it has fallen below 4,000 points since July 3, 2002 — and was 7.81 percent down at about 1045 GMT.

Frankfurt’s DAX 30 also shed more than 10.0 percent and in Paris the CAC 40 dived 9.68 percent. They later nursed losses of 9.06 percent and 7.99 percent respectively.

“We are drowning in a sea of red numbers,” Barclays Wealth analyst Henk Potts said.

“The reality is that most investors have been spooked by the sheer pressure that the credit crunch is putting on the global economy,” he said.

Hong Kong share prices closed down 7.2 percent, Singapore shares ended 7.34 percent lower and Japan’s Nikkei-225 index closed down 9.62 percent.

Tokyo briefly halted some trading in futures and options as the Nikkei saw its largest fall since the crash of October 1987.

A fresh injection of US$45.5 billion into the money markets failed to stop the collapse, and the crisis also claimed its first Japanese victim, with Yamato Life Insurance filing for bankruptcy protection.

Shares around the world have crashed over the past two weeks since the collapse of Lehman Brothers in the US put the focus on banks’ disastrous lending on the US mortgage market.

Central banks have since spent hundreds of billions of dollars trying to keep credit markets moving. The US and Britain have spent massively to prop up their banking systems and Iceland is fighting national bankruptcy.

Japanese Prime Minister Taro Aso, chair of the G8 club of key economies, said he would call an emergency summit if the Washington talks this weekend did not reach a deal.

Ahead of the talks, the IMF called for governments to work together and reactivated an emergency lifeline first used to rescue ailing economies during the 1997 Asian financial crisis.

In Washington, officials said the US could follow Britain’s decision to take preferential shares in troubled banks, effectively part-nationalizing them, in a bid to increase liquidity in the credit markets.

The G7 meeting in Washington was to bring together finance ministers and central bankers from the US, Germany, Japan, France, Britain, Italy and Canada.

US President George W. Bush vowed to take “strong action” over the crisis and emphasized “our common desire to work with our European friends to develop a best-as-possible common policy.”

Marc Chandler, analyst at Brown Brothers Harriman, said despite the grim outlook, the G7 still had options available.

“We are hesitant to spread rumors, but there is increasing speculation that the G7 meeting could take another major step and that is to guarantee all interbank lending,” he said.

Lending between banks is at a standstill because banks fear other banks might fail and want guarantees that contracts will be respected. The freeze is strangling credit throughout the global economy.

A wave of emergency interest rate cuts, rescue packages and massive injections of capital into money markets in recent days, have all failed to assuage the panic.

On Thursday, the European Central Bank opened an unlimited cash lifeline for credit-starved institutions to be available “for as long as needed” and at least until Jan. 20 next year.

In addition, the European Central Bank said yesterday it had pumped more than US$93 billion into interbank money markets to get banks through the weekend.

The crisis of confidence in the markets and among lenders has been underpinned by increasingly pessimistic forecasts for the global economy.

In a biannual report on the world economy, the IMF forecast that the US would fall into recession this year, barely grow next year and risked performing even worse than expected given current uncertainty.

Also See: Japan to propose emergency fund for nations hobbled by financial crisis
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