Global panic as investors take fright at spreading recession

From The Times
October 25, 2008

Gary Duncan, Economics Editor

Shares plunged around the world yesterday as fears of a global recession swept markets in a day of mayhem that saw wild swings in currencies, commodities, stock and bonds. The risk of a severe worldwide downturn triggered another rout in stock markets from Asia to America amid concerns that governments may now be powerless to halt a global slump.

The scale of risks to the world’s rapidly darkening economic prospects was underlined as China’s leaders joined Western governments for the first time to emphasise the gravity of the situation.

“The global financial crisis has been constantly spreading and worsening, creating a severe shock to global economic growth,” Wen Jiabao, the Chinese premier, told an Asia-EU summit in Beijing.

Hu Jintao, China’s President, said that his talks with European heads of government had resulted in large agreement that emergency measures to stave off global recession and reform financial regulation “must be found internationally”. “I think China will make its contribution to the stabili-sation of the world economy,” he said.


In Washington, the International Monetary Fund increased efforts to stem the spread of financial and economic upheavals across emerging markets. It struck a tentative deal with Iceland to restore confidence in the stricken Nordic economy with a $2 -billion (£1.26 billion) loan that will make Reykjavik the first Western capital to borrow from the IMF since 1976.

As a queue of other crisis-hit nations formed at the fund’s doors, including Ukraine, Serbia, Belarus and Pakistan, the IMF said it had more than $200 billion of funds available to prop up troubled economies.

The IMF is believed to be drawing up plans to allow emerging economies to borrow up to five times the amounts normally permitted, which could give countries such as Brazil access to up to $22.5 billion.

Earlier this month it announced that for the first time since the 1990s Asian crisis it was activating other emergency measures that let economies in distress secure aid more swiftly than usual.

Despite the frenzied efforts, jittery markets delivered a brutal vote of no confidence. Shares on both sides of the Atlantic were sent into another tailspin.

In London, the FTSE 100 index slumped by 9 per cent at one stage before closing down by 204.5 points, or 5 per cent. France’s CAC 40 shed another 4 per cent and Germany’s Dax index dropped by 5 per cent, driving European shares to their worst levels for five-and-a-half years.

Mike Lenhoff, of Brewin Dolphin, the London brokerage, said: “I sense we’ve moved beyond the credit crisis. There is a recognition of the damage inflicted on the global economy, that is the recession, by the credit crisis.” In early afternoon trading in New York, the Dow Jones industrial average tumbled by more than 4 per cent, while the broader-based S&P 500 index of American blue chip companies was down 3 per cent.

Overnight on Thursday the Nikkei 225 in Japan closed down by almost 10 per cent. In Moscow, trading was suspended on the stock market after it lost more than a tenth of its value yesterday and hit lows not seen since late 2004. In Europe, the vicious sell-off in shares was fuelled as a key survey of the 15-nation eurozone’s companies showed its vast services sector shrinking at its fastest pace since the aftermath of the 9/11 attacks on the US.

With eurozone manufacturing also shrinking at the fastest pace in at least a decade, markets swiftly drew the conclusion that the world’s second-largest economic bloc was joining Britain and America in recession. “This is it, we are clearly into recession,” Gilles Moec, a eurozone economist at Bank of America, said.

The worldwide panic among investors was stoked by a wave of warnings from the world’s most powerful corporate players of the toll being inflicted on their sales and profit prospects.

Shares in Sony, the electronics giant, sank to a 13-year low after it halved its expected profits. PSA Peugeot Citroën, the French carmaker, announced plans for massive production cuts, while Italy’s Fiat, Germany’s Daimler and South Korea’s Hyundai announced bleak 2009 forecasts. In the US, Chrysler said it was closing one plant early and slashing 1,825 jobs, and General Motors said that it would make big job cuts.

After Alan Greenspan, the former chairman of the US Federal Reserve, said that the global crisis had “turned out to be much broader than anything I could have imagined”, the freefall in shares spilled over into drastic swings in currency and commodity markets.

In a day of extreme volatility on foreign exchanges, the previously unassailable strength of the euro suffered one of its biggest reversals, falling by 3 per cent against a resurgent dollar, which hit fresh two-year highs. The euro fell to levels as low as $1.2488, dramatically down by almost a quarter from its record highs of $1.6038 reached as recently as mid-July.

“You are seeing the currencies move as they would in any sort of full-fledged panic,” Firas Askari, head currency trader at BMO Capital Markets’ in Toronto, said “It’s a little disconcerting to say the least. Everyone needs to take a deep breath. Personally, I think we have to be close to the end of this awful cycle. It’s usually darkest at the bottom.”

Prices for commodities, from copper to zinc, sugar and coffee, as well as oil, were battered as speculators bet that demand for the products would wilt in a world recession.