Iseq plummets as recession fears drag down world markets

 

World markets tumbled again today as fears of a global recession continued to hit investor confidence. The Iseq fell 6.5 per cent, down 188 points, coming off worse than the major European indices.

The FTSE 100 plunged 4.5 per cent, while the French Cac and German Dax indices both finished down more than 5 per cent.

Irish banks led the sell off amid concerns about their ability to raise capital, with one Dublin-based dealer commenting that a "buyer's strike" had now set in amid fears that the Government will be forced to take stakes in banks.

"The world has stopped turning as far as banking is concerned," the dealer said.

Bank of Ireland was the hardest hit, falling 21 per cent during the day but recovering slightly at the close of trading to finish down 14 per cent at €1.65.

Minister for Finance Brian Lenihan has said he has not ruled out the State investing in a bank but would prefer Irish financial institutions to raise capital privately first.

Anglo Irish Bank fell 13 per cent to €1.80, while AIB dropped 8.8 per cent to close at €3.39 and Irish Life & Permanent closed down 7.8 per cent at €3.54.

In the US, the Dow Jones industrial average lost 250 points while The White House set a date of November 15 for the first of a series of international crisis summits.

The biggest financial disaster in 80 years wrought more havoc from Budapest to Buenos Aires as the day wore on.

Hungary increased interest rates to defend the forint, Ukraine, Pakistan and Belarus sought IMF help, currencies tumbled against the dollar and yen, global stock markets fell and US companies announced job cuts and weaker earnings.

The summit, 11 days after the US presidential election, will bring together leaders of the G20, which includes the Group of Seven major industrial economies plus key emerging-market countries like China, India and Brazil.

Stung by more bad news from companies that are the backbone of the U.S. economy, major U.S. stock indexes dropped about 3 per cent and oil hit a 16-month low below $68.

AT&T and Boeing were among companies reporting weaker-than-expected earnings, and drugmaker Merck & Co said it would cut 7,200 jobs.

Battered US bank Wachovia, set to be taken over by Wells Fargo, posted a $23.9 billion third-quarter loss, a record for any U.S. lender in the global credit crisis.

"We started the week off in good spirits about the credit market loosening up, and then the onslaught of earnings hit us," said Arthur Hogan, chief market analyst at Jefferies & Co.

Interbank borrowing costs mostly fell, with further steep falls in dollar rates and spreads indicating that the flood of liquidity pumped into the banking system in recent weeks is easing money market strains.

Emerging market stocks, sovereign debt and currencies all came under intense pressure. The dollar and the yen were gainers as investors moved out of riskier assets in other currencies.

Standard Bank G10 currency strategist Steve Barrow said in a note to clients that markets were seeing a massive unwinding of the speculative asset bubble of recent years.

"History shows that, when bubbles burst, no amount of glue, from slumping Libor rates or anywhere else, can stick them back together again. The law of 'what goes up must come down' has to work its way through and, right now, it is working its way through the currency market with a vengeance," Barrow said.

Hungary increased interest rates by three full points to defend its forint currency.

Argentina's bonds fell 7 per cent and stocks lost 10 per cent after President Cristina Fernandez sent a bill to Congress yesterday to nationalise the country's private pension system, sending markets into freefall.

Belarus' central bank said it had requested credit from the International Monetary Fund, and Ukrainian Prime Minister Yulia Tymoshenko said she expected Kiev to receive substantial financial aid from the IMF next week.

The IMF is also ready to help Pakistan, which needs funds to avoid a balance of payments crisis, and Iceland, driven close to bankruptcy as frozen credit markets caused its banks to fail.

The overarching fear was recession, a topic that will be weighing on the minds of world leaders at the November 15 summit to be held in the Washington, D.C., area.

The White House said it would seek input for the summit from whoever wins the November 4 US presidential election.

"The leaders will review progress being made to address the current financial crisis, advance a common understanding of its causes, and, in order to avoid a repetition, agree on a common set of principles for reform of the regulatory and institutional regimes for the world's financial sectors," said White House spokeswoman Dana Perino.

Minutes from the Bank of England's last meeting, at which it joined a coordinated round of rate cuts, said the economy had deteriorated substantially and the bank's governor Mervyn King said on Tuesday it was probably entering its first recession in 16 years.

The Dow and S&P 500 fell more than 3 per cent. European shares were down around 5 per cent and Japan's Nikkei average ended down 6.8 per cent.

In emerging markets, MSCI's sector index was at its lowest since June 2005, and sovereign debt spreads widened beyond 700 basis points over Treasury yields for the first time since early 2003.

Currencies other than Hungary's forint were also battered, with the Turkish lira falling to the lowest in more than two years and South Africa's rand at its lowest in more than 6 years against the dollar.

The latest market turmoil came despite some optimistic words from various officials about the financial crisis, which has prompted billions of dollars in rescue and liquidity packages from governments around the world.

US Treasury Undersecretary David McCormick, speaking in Hong Kong, said the US economy was in for a challenging few quarters but could start to recover late next year.

Bank of England governor King said that the worst may have passed for the financial system.

"We are far from the end of the road back to stability," he said late on Tuesday. "But the plan to recapitalize our banking system, both here and abroad, will, I believe, come to be seen as the moment in the banking crisis of the past year when we turned the corner."

Emerging powerhouse Russia, whose markets have been battered, also signalled improvements in bank lending.

"The interbank (lending) has started working normally. The rates are high but coming down. Banks have started crediting sectors again. But we still need two or three weeks for the situation to start improving," the Financial Times quoted First Deputy Prime Minister Igor Shuvalov as saying.

Additional reporting: REUTERS