Recession Fears Batter Markets Across World
Thursday, October 23, 2008
LIMA, Peru, Oct. 23 -- Stock markets around the world suffered steep losses Wednesday, with the sell-off particularly strong in Latin America and Eastern Europe, as investors acted on worries that recession is setting in even if financial institutions are being stabilized.
Investor nervousness spread across time zones, affecting markets in Europe, Africa and the Americas. The declines continued Thursday in Japan, where the benchmark Nikkei average dropped as much as 7 percent in early trading.
"Various countries are staring down the barrel of recession, and this is the point where the man on the street starts to realize it," said Alex Potter, banking analyst at Collins Stewart in London.
On Wednesday, British Prime Minister Gordon Brown warned Parliament of a global recession. His statement and a similarly downbeat assessment Tuesday evening by Mervyn King, governor of the Bank of England, were the British government's first official acknowledgments that a recession, which analysts had been predicting for weeks, was imminent.
Swiss bank UBS issued a report predicting that the gross domestic product of the euro zone -- the 15 countries that use the euro currency -- would shrink 0.3 percent next year, while the United States' GDP would contract 0.7 percent and Britain's would drop 1.4 percent.
Much of the day's trading focused on the newly globalized economies known as emerging markets, which have drawn in international investment money, often from people dabbling in markets they hardly understand, whether Hungarian bonds or the Brazilian currency, the real.
Nick Chamie, head of emerging markets research at RBC Capital Markets in Toronto, said that the global financial crisis has led to a massive credit crunch and that "we are seeing much of that money reversing itself." Investors are pulling out huge amounts of money rapidly, creating problems for local markets and banks.
Warsaw's NTX index of 30 companies in the region declined 6.8 percent Wednesday, extending this year's drop to 55 percent, according to Bloomberg Business News. Hungary's BUX index fell 5.2 percent, and the Czech PX index dropped 3.8 percent.
The problem has been compounded by fiscal policies, Chamie said. Countries such as Hungary, he said, rang up large debts, ran large current account deficits and relied heavily on money borrowed from overseas. "That left these countries in a weaker position to deal with drying up global credit," he said.
Latin American stocks were also hammered during the day. Argentina's Merval index dropped more than 10 percent after President Cristina Fernández de Kirchner's pledge to nationalize the country's pension system.
She denied that the takeover of $29 billion in funds was a veiled attempt to finance the strapped government, calling it a "strategic" move to protect retirees. But the move raised new concerns about the Argentine economy and about whether a debt default was looming.
"This is an improvised idea. It's an example of how little the president and her husband understand reality," said Pablo Guidotti, a former treasury secretary of Argentina and dean of the school of government at Torcuato Di Tella University in Buenos Aires. "If this measure takes effect, there will never be incentives to bring back foreign assets; on the contrary, you will see more capital flight."