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As Contagion Spreads, Moods Abruptly Shift
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Sarkozy's office said he had conferred Friday with President Bush, pushing his idea for a meeting of heads of state from the major industrial powers by year's end to envision a top-to-bottom overhaul of the world financial system. The summit could be held at Bretton Woods, N.H., where officials met in 1944 to set the basics of today's world financial system, the Paris media reported.
European markets were closed by the time the House of Representatives voted, but in Brazil, located in a closer time zone, the news sent the Bovespa index on its largest drop in a decade. Trading was halted for half an hour.
Some economists attributed the fall to concerns that economic troubles in the United States could hurt Brazil's commodities trade. "If the United States goes through a huge recession, other countries will suffer," said José Márcio Camargo, an economist at Opus Gestao de Recursos, an asset management firm in Rio de Janeiro. Brazil's treasury, meanwhile, injected nearly $8 billion into the country's national development bank to help companies that are having trouble accessing credit.
Guillermo Mondino, an analyst with Barclays Capital, wrote in a new report that "the global credit crunch seems increasingly to be spilling over to emerging markets. Lines of credit are tightening, disruptions in domestic banking systems are on the rise, and domestic interest rates are increasing. The result is likely to be slower growth."
Mondino wrote that Latin America may feel a credit pinch because foreign banks are such major players in the region. Foreign banks account for 80 percent of the financial system in Mexico, 51 percent in Peru, 29 percent in Chile and 22 percent in Brazil.
Monday's bad news in markets began in East Asia. Japan's Nikkei average closed down 1.3 percent, while Hong Kong's Hang Seng index was down 4.3 percent and India's Sensex was off 3.9 percent. The trend continued in Europe: The London exchange's FTSE 100 closed 5.3 percent lower, Paris's CAC 40 was down by 5.04 percent, the DAX in Frankfurt closed down 4.2 percent and Moscow's Micex was off 5.5 percent.
Europe's sense of confidence was particularly undercut by the rescue of Fortis, a Dutch-Belgian banking and insurance giant that once ranked among the world's top 20 financial institutions. The Dutch, Belgian and Luxembourg governments said Monday they had put up the equivalent of $16 billion to buy the group's faltering banking operations, in effect nationalizing them for now.
Fortis's troubles were partly related to its role in a huge takeover deal and fears among investors that, despite their leaders' reassuring comments, European banks are too tightly linked to their U.S. counterparts in a globalized monetary system to escape the crisis. Even after the rescue plan was announced, Fortis stock dropped 12 percent during Monday's trading.
As the possibility of bailouts loomed in Europe, many officials had worried whether the European Union, composed of 27 countries with sometimes opposing points of view, would be paralyzed. Buiter, of the London School of Economics, said the speed of the Fortis rescue showed otherwise.
The injection of funds into Fortis "happened overnight and without anyone needing to consult with parliaments," he said. "The political capability for addressing a crisis like this is significantly greater in Europe than in the U.S. There was doubt, until today really, that multiple national treasuries would be able to agree on sharing rules."
In Britain, authorities announced a bailout for Bradford & Bingley, a bank specializing in mortgage loans. The government put up $90 billion to absorb questionable loans, the announcement said, while the Spanish bank Santander paid $37.8 billion to take over retail and savings bank branches.
Alistair Darling, Britain's chancellor of the exchequer, or finance minister, said his main concern was to protect investors and borrowers. "All of us, wherever we are, in whatever part of the world, need to do what is right in order to maintain stability and get through a period which quite frankly we have never seen the like of for a generation."
