Recession Fears Batter Markets Across World

By Joshua Partlow and Kevin Sullivan
Washington Post Foreign Service
Thursday, October 23, 2008; D01

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."

Brazil's Bovespa index fell more than 10 percent, triggering a suspension in trading, while the local currency continued its drop against the U.S. dollar. Stock markets in Mexico, Chile and Colombia joined the trend.

Reports of poor earnings from major U.S. corporations such as Wachovia and Boeing fueled investor pessimism, as did news of sagging prices of commodities such as corn and soy, which are important exports for South America.

Markets in industrial countries took a beating as well. London's FTSE 100 and Germany's DAX index lost 4.5 percent, while France's CAC-40 finished 5.1 percent lower. Indexes closed down nearly 8.2 percent in Madrid and 3.6 percent in Milan.

After South Korean stocks fell to a three-year low Wednesday, the Kospi index dropped 6.6 percent in early trading Thursday. The country's troubled currency, the won, fell further against the dollar Wednesday. A $130 billion stabilization plan by the Seoul government has failed to overcome concern that a global recession will drag down South Korea's export-dependent economy.

In trading Wednesday, Japan's markets shed 7 percent of their value. Major exporters Sony and NEC Electronics were hit by sell-offs. Both companies are being squeezed between the soaring value of the yen, which makes Japanese goods more expensive, and the growing reluctance of U.S. and European consumers to keep on buying.

Japan's largest bank, Mitsubishi UFJ Financial Group, dropped 8.8 percent, after a newspaper report that its half-year profits would probably decline by 50 percent because of bad loans and write-offs on investments.

In Britain, Brown's bleak statement briefly drove the pound to its lowest level against the dollar since September 2003.

Rodney Barker, professor of government at the London School of Economics and Political Science, said that by "acknowledging the obvious" about a looming recession, Brown was trying to stay in control of political events. "It's a bit like being overdrawn at the bank," Barker said. "It's much better if you ring your bank manager and if you take initiative and give the impression of being vaguely in charge."

Sullivan reported from London. Correspondent Blaine Harden in Tokyo and special correspondents Brian Byrnes in Buenos Aires and Karla Adam in London contributed to this report.