Deepening fears about the financial crisis in Europe and doubts about a $700-billion United States rescue sent global stocks plummeting on Monday as governments scrambled to prevent a run on banks.
The €50-billion bailout of German bank Hypo Real Estate (HRE) and the takeover of Dutch-Belgian bank Fortis by French giant BNP Paribas did little to ease the turmoil.
“There is all-out panic,” said Adrian van Tiggelen, ING senior strategist in The Hague.
The London, Frankfurt and Paris stock markets were all more than 5% down while Tokyo closed at a new four-year low on doubts about efforts to ease the crisis. Wall Street’s Dow Jones industrials index fell 2,7% in first trades.
In a round-the-world rout, trade on Russia’s stock market was suspended after its main index nosedived more than 15%. Indonesia fell 10%, Brazil 9,5% and Oslo 9%.
Germany’s move to guarantee all savings deposits on Sunday was followed by Denmark, adding pressure on other European governments following the lead already taken by Ireland and Greece last week. The German Finance Ministry said the value of its guarantee was “significantly more than €1-trillion”.
British Prime Minister Gordon Brown called a meeting of his “economic war cabinet” to reportedly consider shoring up ailing banks with billions of pounds in return for shares.
Finance Minister Alistair Darling said that the government is ready to take “some pretty big steps that we wouldn’t take in ordinary times”.
The Spanish government said it did not rule out boosting guarantees on bank deposits if the European Union fails to adopt a common policy.
Iceland, whose economy relies heavily on the financial sector, suspended trading in all financial shares, including three major banks, amid reports of a government rescue of the stricken banking sector.
“Everyone had hoped that after the acceptance of the package in the US and the bailouts in Europe things would calm down,” added Van Tiggelen. “But in effect, there are still strong fears of the domino effect.”
Bank of America chief economist Mickey Levy said the potential extent of the crisis was enormous.
“Strains in funding markets for banks and other financial markets have now escalated to such an extent that all major industrialised economies of the world are either in or at the brink of outright recession,” he said.
‘Extremely serious’
International Monetary Fund (IMF) chief Dominique Strauss-Kahn said the IMF’s upcoming World Economic Outlook would show a marked fall in growth and warned the crisis could trigger famines in Africa and Latin America.
“The consequences may be extremely serious because they will be counted in terms of famine or malnutrition in children.”
The current turmoil emerged owing to the collapse of loans to would-be US homebuyers with dark credit histories.
When people began to default, a chaotic chain reaction ensued, revealing that cheap credit throughout the financial system had created a massive bubble.
The US government agreed on Friday to buy up $700-billion of bad mortgages and other assets from banks, freeing them up to start lending again. But US President George Bush has warned that the impact will not be felt immediately.
Italian Prime Minister Silvio Berlusconi raised the prospect of a US-style rescue fund at a meeting of eurozone finance ministers on Monday, after the same idea was shot down at a mini-summit in Paris on Saturday.
French President Nicolas Sarkozy, meanwhile, appealed for an end to the panic, saying on a visit to a car plant: “We have to stay the course and keep calm, keep cool heads.”
In Belgium, trading in shares of Fortis were suspended the day after BNP Paribas took a controlling interest in the troubled finance group under an emergency deal with the Belgian and Luxembourg governments.
Central banks continued to pump tens of billions of dollars into interbank money markets that are now essentially on life-support from state institutions because commercial banks are too frightened to lend to each other.
In a bid to increase liquidity, the US Federal Reserve said it would begin to pay interest on bank deposits for the first time and expand its refinancing operations for commercial banks to $600-billion.
“The payment of interest on excess reserve balances will give the Federal Reserve greater scope to use its lending programmes to address conditions in credit markets,” it said in a statement. — AFP