World economy – is now the time to panic?
Desperate measures by governments in Europe and North America to steady the banking system failed to stem panic in global markets overnight amid deepening gloom at the scope of the financial crisis.
Nothing seemed to stop stock markets taking, in many cases, record falls.
The world economy is running on fear. Consumers predict hard times ahead and are cutting back, banks don’t trust each other and are reluctant to lend money, and markets are panicking as the US bailout fails to stop Wall Street and world markets from plunging.
Since Friday’s bailout:
- Australian share market closed at a 3 year low yesterday, and loses another 3pc today.
- Dollar fell to below $US0.70 for the first time in four years.
- Asian and European markets tumble, with Japan’s Nikkei at a 4 year low.
- Europe in turmoil, with EU leaders unable to co-ordinate a rescue
- Germany bailed out failed bank Hydro for €50billion, as some EU governments move to insure deposits.
- The European Central Bank today pumped €37 billion into the market to keep credit flowing. The euro fell to a 13-month low.
- On Wall St overnight, markets plunged below 10,000 – even more than the steep plunge when the first attempt to pass the bailout failed.
- Oil prices plunges below $US90 on fears that Chinese demand will fall as consumers stop spending.
Last week, economists and politicians reassured investors that Australia’s resources book and regulated bank system mean the country will be safe from the fallout. But worried investors, who are watching their investments shrink, are wondering ‘is it time to panic?’
The ‘Worst Fear’
Nigel Gault at Global Insight said the markets were seeing a realisation of « the worst fear », namely « that the financial crisis and the slowdown in economic growth would reinforce each other, dragging the economy into recession, perhaps a severe one ».
In Washington, US Treasury officials said they would act quickly to implement a massive bailout plan for the financial sector, seeking bids by tomorrow for managers of toxic mortgages at the root of the crisis.
« When will the slide end? It’s anybody’s guess, » said David Kastner at Charles Schwab.
« But the aggressive actions being taken by the Fed, and increasingly by the central bankers in Europe and Asia, point to an eventual stabilisation in confidence – where the real crisis lies. »
The US bailout has failed to stop the financial panic spreading to Europe, where more large banks have failed.
As the panic spreads to Europe, leaders there dithered over how to work together, and markets plunged on the confusion.
A weekend summit of the European Union’s big four leaders in Paris, member states’ leaders issued a joint statement yesterday vowing to defend banks but remained divided on a US-style bailout fund and whether or not to insure bank deposits.
“This is precisely why investors have become nervous,” said Andrew Busch at BMO Capital Markets.
“Each action appears to be country-centric with no over-arching solution like in the United States.”
London’s FTSE 100 index fell 7.86 per cent, Paris’ CAC 40 index fell 9.04 per cent, its heaviest one-day loss since its creation in 1988. Frankfurt’s DAX fell 7.07 per cent, and Dublin’s ISEQ index ended down 9.59 per cent.
Bailout ‘has not worked’
« The bank bailout has not worked, » said economist Peter Morici at the University of Maryland.
« The bank bailout will provide banks with much-needed liquidity but it does not address the compensation and management practices on Wall Street that drove irresponsible decisions and gave rise to the crisis. »
A few analysts tried to keep a brave face.
« Let’s try to rise above this depressing deluge of doom and review why the world might not come to an end, although it sure looks bad this morning, » said Ed Yardeni at Yardeni Research.