Markets panic as Obama, leaders try to restore confidence

9th August 2011, Comments 0 comments

Efforts by US President Barack Obama and fellow global leaders to restore confidence failed miserably Tuesday as markets plunged to new lows in a massive sell-off driven by fears of a new recession.

European stock markets fell deeply into the red, with early gains for some wiped out without mercy in near panic sales.

"We have now moved into an emergency phase of the eurozone debt crisis," ING debt strategist Padhriaic Garvey.

"The financial crisis has changed its nature and become even more vicious," Berenberg Bank chief economist Holger Schmieding said while other analysts talked of potential major shifts in the global economic order.

All the main markets suffered heavy losses in early trade but were showing some signs of stabilising by midday as investors waited for the New York opening and a meeting of the US Federal Reserve as US investors come to terms with an unprecedented US ratings downgrade by Standard and Poor's on Friday.

London was down about one percent, Frankfurt was off more than two percent and Paris was flat.

"It's possible that markets are starting to slowly share a similar view to ours that the Western World financial system built over the last two to three decades might be totally unsustainable," Deutsche Bank analysts said in a note.

On top of concern about the eurozone and US debt, Chinese inflation of 6.5 percent, the highest level in three years, raised the chances of interest rate hikes that would curb economic activity in the world's second biggest economy.

And in London, a third night of riots produced graphic images of the kind of violence already seen in Athens against Greek austerity measures which could unsettle markets further, especially if they spread.

Investors were looking ahead to the US Fed meeting later in the day in the hope the US central bank could come up with some fresh cash to spur activity under its policy known as Quantitative Easing (QE) -- but many were sceptical it has any firepower left with which to stem the tide.

In Europe, a subject of growing concern were the debt ratings of Britain and especially France, which would have to make a major contribution to any hike in emergency lending to Italy and Spain, seen as the next most at risk eurozone countries.

"The thinking is if the US (rating) can be downgraded, then the likes of the UK and France could be next in the firing line," Garvey said. "The threat to the French (top) AAA rating is the most worrying."

European Central Bank president Jean-Claude Trichet insisted once again Monday that governments had to cut public deficits and restore sound finances.

"We expect governments to do what we consider to be their work, their duty," Trichet told Europe 1 radio in France.

On Monday, Obama sought to convince markets that an historic US downgrade by Standard & Poor's from the top rating of AAA to AA+ did not reflect the true state of the world's biggest economy.

The US president insisted in a televised speech that the United States "always will be a triple-A country."

But on Wall Street, the Dow Jones Industrial Average fell more than five percent or 634.76 points -- its steepest one-day drop since late 2008 -- to close at 10,809.85, erasing all of its gains since last October.

Obama also spoke with Spanish Prime Minister Jose Luis Rodriguez Zapatero and Italian Prime Minister Silvio Berlusconi, calling for a united fight against a global economic slowdown.

That echoed similar comments a day earlier by the Group of 20 industrialised and emerging economies.

Few Asian markets were impressed by what Barclays Capital called "consoling words" and most closed Tuesday with losses on top of steep drops seen the day and week before.

Tokyo gave up 1.68 percent while Hong Kong plunged 5.66 percent.

Seoul was down 3.63 percent but Shanghai managed to end the day unchanged while Sydney staged a massive turnaround to finish with a gain of 1.22 percent.

Berenberg's Schmieding said that "with agressive intervention, central (banks) can stop panics."

He urged US Fed chairman Ben Bernanke to disregard "objections from US hardliners" in the anti-tax Tea Party wing of opposition Republicans and mull a third round of bond purchases, which markets are calling QE3.

Meanwhile, European political leaders worked for parliamentary approval of the terms of an emergency rescue plan agreed on last month, but which could take weeks at least and has roused opposition in several countries.

Purchases of eurozone government bonds to ease market pressure on weakened countries, one measure foreseen for the eurozone's rescue fund, the European Financial Stability Facility (EFSF) -- will not suffice if a big country like Italy or Spain needs help.

"The degree of intervention needs to be significantly larger" than the EFSF's warchest of 440 billion euros ($625 billion), Garvey noted, and Germany, the biggest eurozone donor, is not ready to boost it further.

Christoph Schmidt, an economic advisor to the German government, wrote Tuesday in business daily Handelsblatt that enlarging the EFSF was "unacceptable" and unnecessary.

He also warned that German voters would reject "a constantly widening liability union through the back-door."

But Germany holds the key to funding of indebted eurozone countries and in another Handelsblatt editorial, commentator Thomas Hanke pressed Chancellor Angela Merkel to make the case for more funding.

Drawing a parallel with the situation in the 1920s before the Great Depression and the rise of the Nazi party, Hanke stressed: "We don't have to make the same mistake again today."

© 2011 AFP

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