/ 16 August 2007

World leaders urge calm amid fresh stock-market turmoil

World leaders on Thursday insisted that the United States credit crunch would not cause an economic crisis but stock markets across the world plummeted yet again as investors remained unconvinced.

US Treasury Secretary Henry Paulson admitted that American growth will be hit but said the economy would weather the storm because it came “against a backdrop of a very healthy global economy with strong fundamentals”.

French President Nicolas Sarkozy said he was confident the fall-out from US credit markets would have no long-term effect on growth, while Australia’s Prime Minister John Howard said the economy could withstand the shock.

But their words failed to convince stock markets.

They tumbled yet again, wiping tens of billions of dollars off share values in Asia and Europe. From London to Hong Kong, Tokyo to Sydney, weary traders’ screens were awash with red again.

All eyes were on Wall Street, where markets were to reopen at 13h30 GMT, and where on Wednesday anxiety again gripped investors who sought safe-haven assets such as government bonds.

“There’s a growing fear that the turmoil in the credit markets, along with rising investor fear, could start to undermine the global growth and strong company-profits story, and the markets could be at the start of a negative spiral,” said John Noonan, an analyst at Thomson IFR Markets.

Crude oil prices fell heavily as traders fretted that the market turbulence could crimp economic growth and demand for energy. And major currencies were also roiled, with the yen soaring against the euro and the dollar as players unwound risky bets.

Investors are worried about a global credit squeeze as more banks and investment funds around the world reveal their exposure to the slumping US subprime, or high-risk, home-loan sector, analysts said.

Central banks across the world have since last week pumped tens of billions of dollars into the banking system, offering loans at lower rates to commercial banks to forestall a credit crunch that could damage economic growth.

The Bank of Japan said on Thursday it would inject a further 400-billion yen ($3,4-billion) into the system to calm frayed nerves.

The crisis stems from the US housing market, which after years of booming house prices and cheap credit, is now in reverse, with loans becoming more expensive and house prices falling.

This has caused high numbers of mortgage defaults as borrowers, particularly subprime borrowers — people who have a poor credit history — struggle to make their repayments.

Dozens of US mortgage lenders have been put out of business and major US and European banks have taken a hit.

The link between subprime borrowers and turmoil in financial markets involves much financial wizardry that enabled banks and funds all over the world to make investments that are essentially bets on borrowers repaying their mortgages.

President Sarkozy called for the Group of Seven most industrialised nations to take steps to improve transparency in world markets.

He noted that complex financial operations had helped boost the world economy but warned that the bearers of risk in these operations were often “very badly identified and this lack of knowledge is in itself a factor of instability”.

But Sarkozy insisted that “these market movements will not lastingly affect the growth of our economies, which is strong”.

US Treasury Secretary Paulson, for his part, said that fears over the US mortgage market “will extract a penalty on the growth rate” of the US economy.

But “the economy and the markets are strong enough to absorb the losses” without provoking a US recession, he told the Wall Street Journal.

In Australia, a local lender said it had failed to refinance $5-billion in debt, saying that the US mortgage credit crunch had starved the market of liquidity.

But the government insisted the economy could withstand the shockwaves of the global market turmoil.

Prime Minister Howard said Australia had a much smaller percentage of the sort of risky subprime mortgage loans that caused the financial meltdown in the United States and urged people not to overreact. — AFP