Recession fears hit financial markets

Growing warnings of an ”inevitable” global recession and the expectation of more interest-rate cuts triggered turmoil on the currency markets and sharp falls on stock exchanges on Wednesday.

The British pound fell to a five-year low against the dollar as Prime Minister Gordon Brown indicated Britain is ”likely” entering a recession, while the euro and other high-yield currencies saw sharp falls.

On the stock markets, Japan’s Nikkei share index closed down by 6,79% after Wall Street’s Dow Jones index sunk by 2,5% on Tuesday while Europe’s major markets were all down.

In late morning trading, London was down by 3,35%, while Paris lost 3,44% and Frankfurt fell by 3,25% near the half-way stage.

Europe faces ”inevitable” recession that will begin ”almost in synch with the US”, said a forecast by Swiss bank UBS, with a ”dramatic” downturn for countries that have overvalued real-estate markets, such as Spain and Britain.

Brown reached a similarly gloomy assessment as he appeared before lawmakers, saying the downturn needs to be confronted with the same vigour with which governments have moved to safeguard ailing banks.

”Having taken action on the banking system, we must now take action on the global financial recession, which is likely to cause recession in … Britain, too,” Brown said during his weekly questioning session in Parliament.

Crucial data is expected to show on Friday that the British economy shrank in the third quarter after zero growth in the second. The technical definition of a recession is two straight quarters of negative economic growth.

In a speech late on Tuesday, Britain’s central bank Governor, Mervyn King, said the financial crisis has squeezed the amount of money banks will lend to consumers and companies, at a time when high energy and food prices are also reducing disposable incomes.

The prospect of a sharp economic slowdown raises the chances that the British central bank will again cut interest rates, making sterling a less attractive investment than the euro or the dollar.

An expectation of similar rate cuts in the 15-nation eurozone to spur economic growth forced the euro towards a near two-year low against the dollar.

There were also more signs of trouble in the emerging markets, with South Africa’s rand falling to a six-year low against the dollar.

After Hungary’s forint currency fell to a near two-year low point against the euro, the central bank in Budapest moved to stop further plunges by hiking up its key interest rate by three points.

”The escalation of the crisis has revealed or exacerbated existing vulnerabilities [in emerging markets] such as current-account deficits that were ignored when times were good — ie, capital was plentiful,” said the New York-based RGE think tank in its latest newsletter.

Indian Prime Minister Manmohan Singh called for developing nations to play a role in ending the turmoil, which was triggered by huge losses by global banking giants in mortgage-related securities and led to a collapse in market confidence.

”Developing countries like India are also affected by the crisis, and have to be part of the solution,” he said.

The central Reserve Bank of India cut its lending rate for the first time since 2004 earlier this week, and Singh has conceded that the nation will face a ”temporary slowdown” from ”the ripple effects” of the crisis.

The turbulence on the stock and currency markets came despite new attempts by the US Federal Reserve to restore confidence to the fragile financial system.

In a bid to help troubled money market mutual funds, the Fed said it will make available up to $540-billion for purchases of highly rated short-term debt.

The market for these assets, which in normal times are considered safe investments offering modest returns, has frozen up in recent weeks as the global financial crisis worsened.

The US last month unveiled a $700-billion bailout package for its banks while European governments have also guaranteed interbank loans worth more than $1-billion to stimulate lending.

Meanwhile, in Argentina, President Cristina Kirchner announced plans to nationalise 10 private pension funds holding $30-billion in assets.

”We are taking this decision in the international context in which the G8 [Group of Eight] countries and others are seeking ways to protect banks,” Kirchner said. — Sapa-AFP

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Roland Jackson
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