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Download PDF Deepening fears about the financial crisis in Europe and doubts about a 700-billion-dollar US rescue sent European and Asian stocks tumbling Monday as governments scrambled to shore up confidence.
The 50-billion-euro (68-billion-dollar) bailout of the fourth biggest German bank Hypo Real Estate and the takeover of Dutch-Belgian bank Fortis by French giant BNP Paribas did little to ease a growing sense of alarm.
“There is all-out panic,” said Adrian van Tiggelen, ING senior strategist in the Hague.
Germany’s move to guarantee all savings deposits to prevent a run on banks added pressure on other European governments to make similar promises, following the lead already taken by Ireland and Greece.
The crisis whipsawed through world stock markets with London and Tokyo sinking to four-year lows on doubts about the global crisis management, while Frankfurt and Paris lost more than four percent in early trading.
Trade on Russia’s ruble-denominated stock market was suspended after its main index nosedived more than 15 percent.
“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 it was hard to overestimate the potential extent of the crisis.
“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.
Amid the turbulence, the euro fell to a 13-month low of 1.3551 dollars. Oil prices slipped below 90 dollars a barrel amid fears of a global downturn.
The current turmoil emerged owing to the collapse of widespread loans to would-be US homebuyers with spotty credit histories.
When people began to default on these so-called subprime mortgages, a chaotic chain reaction ensued, revealing that cheap credit throughout the financial system had created a massive bubble.
Under a US rescue plan passed Friday, the government will buy up to 700 billion dollars of bad mortgage-related and other assets from banks, wiping the debts from their books and freeing them up to start lending again.
But US President George W. Bush cautioned Saturday: “The benefits of this package will not all be felt immediately.”
Meanwhile, Hypo Real Estate (HRE), a key lender for construction and mortgages in Europe’s biggest economy, hailed the second rescue plan in a week which has become the biggest in German financial history.
On Sunday, arm-twisting by the finance ministry led to a late-night accord with the Bundesbank central bank, private banks and market regulators on an additional 15-billion-euro guarantee for HRE, which had already received guaranteed credits worth 35 billion euros.
Chancellor Angela Merkel warned however that “those who did irresponsible business will be held accountable”.
Germany saw itself forced to offer unlimited protection for personal bank deposits. The finance ministry nearly doubled its initial estimate the value of the guaranteed accounts to total “significantly more than one trillion euros”.
Italian Prime Minister Silvio Berlusconi raised the prospect of a US-style rescue fund for Europe ahead of a meeting of eurozone finance ministers Monday, after the same idea was shot down at a mini-summit in Paris Saturday.
French President Nicolas Sarkozy meanwhile appealed for calm, saying on a visit to a car plant: “We have to stay the course and keep calm, keep cool heads.”
Britain reportedly mulled shoring up ailing banks with billions of pounds in return for shares. Finance minister Alistair Darling called a meeting of an emergency economy committee to consider the partial nationalisation of banks.
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.
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.
Analysts say very little money is being lent for more than a few days.
It was against this backdrop that European governments first assured their banking systems were safe, then promised support for banks, and one after another began strengthening guarantees for bank deposits.
But the plunge of stocks in Asia and Europe was a strong signal that the need for a second attempt to save Hypo Real Estate has swept away market confidence that the US plan might mark the beginning of a quick turnaround.
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