Global financial system on the brink of crisis: Larry Elliott

World’s financial markets closed for business nursing losses of more than $2.5 trillion (£1.53tn) after a week of selling The world’s financial markets closed for business nursing losses of more than $2.5 tn (£1.53tn) after a week of turbulent selling not seen since the dark days of late 2008, when the big beasts of banking were forced to beg for government help and the global economy was gripped by its worst recession since the 1930s. Hundreds of billions of pounds have been wiped off share prices in London. Across the Atlantic, Wall Street alone was staring at losses of $2tn or more after a fortnight of almost incessant selling. Front pages again carried pictures of traders with their heads in their hands looking at a sea of red on their computer screens. The jagged downward lines of share price indices pointed the way in which the world economy seems to have turned after a week that has left the financial system on the brink of another global crisis. It seems that the problems that first emerged at the outset of the credit crunch four years ago almost to this very day – the unofficial anniversary is this coming Tuesday, 9 August – never went away despite billions of taxpayer support for the system. Louise Cooper, an analyst at BGC Partners, said City traders were starting to “feel the fear. The banking industry is yet again facing a crisis – we are not yet at the post-Lehman days, but the system is creaking loudly. The horrible reality is that those leaders in charge of our economy have no answers.” Even a jobs boost for the US was not enough to lift the mood of deep gloom which had descended over financial markets seven days ago. On a sweltering morning in Washington DC last Friday, the latest health check on the US economy was broadcast around the world , and at first glance the prognosis was bad. The US economy, official figures showed, barely grew in the second quarter of 2011. On closer examination, the bulletin was even worse. Revisions to past data showed that the plunge in activity during the recession had been deeper than originally believed and the recovery much weaker. Those US growth figures kicked off a week of mayhem in the world’s financial markets. They were, according to Nick Parsons, head of strategy at National Australia Bank, a real “game changer” because up until last Friday, US policy makers could shrug off poor data as simply a soft patch for the economy. “But, with no momentum in the economy, a recession much deeper than thought and a recovery which hadn’t even regained the lost ground after three and a half years, data disappointments can no longer just be shrugged off,” Parsons said. “They’re the new reality, and the new reality sucks.” Across the Atlantic, a second shoe was about to fall. Barely a week after the leaders of the 17 nations of the eurozone had hailed as historic a package that offered fresh help for Greece and the promise of pre-emptive support for any other member of the single currency that fell foul of jittery bond market investors, the deal was already unravelling. The immediate cause for concern was not one of the usual suspects but Cyprus, one of the smallest members of the euro club and which appeared to be the next country likely to need financial help. But events at the eastern end of the Med were just the sign of worse to come from its bigger partners. Much worse. By the time Wall Street dealers had returned from their weekends in the Hamptons, there was more poor economic data to digest, and not just from the US this time. The first day of each month sees the release of reports on manufacturing from around the world. In the UK, China, the eurozone and the US, the message was the same: activity was slowing, in some cases to the point where industrial output was stalling. Tuesday saw the focus switch back to Europe, where the interest rates on Spanish and Italian bonds rose above the level deemed critical in the financial markets – 6% – and to their highest levels since the creation of the single currency. Spain’s prime minister, José Luis Zapatero, said he was postponing his holiday plans. Italy held an emergency meeting of economic policy makers. In Britain, by contrast, yields on benchmark 10-year gilts fell to their lowest level since 1946. The Treasury said it was a sign of confidence in George Osborne’s decision to take a lead on deficit reduction, a lead that the US was now being forced to follow. But Jonathan Portes, director of the National Institute for Economic and Social Research, said low gilt yields were a sign of economic weakness. In the City, they said the UK was the best-looking horse in the glue factory. Wall Street closed 265 points lower. The economic news from the UK on Wednesday was, for once, better than expected. The barometer of the services sector, which accounts for 75% of national output, showed a rise in July, something that in normal circumstances would have bolstered confidence in the markets. But with Wall Street down heavily overnight and taking another thumping in early New York trading thanks to disappointing news from the US services sector, the FTSE 100 dropped 133 points. A late rally, which saw the Dow break an eight-day losing streak, came too late for London dealers. And so the scene was set for Black Thursday, a day when all the pieces of the jigsaw slotted together. There was a thumping loss for the partly nationalised Lloyds bank. There was criticism from José Manuel Barroso, president of the European commission, of the snail’s pace at which European leaders were responding to the crisis. This from the man who had been insisting Europe was finally on top of its crisis. The European Central Bank appeared to be doing the bare minimum to defuse the tension. Speculation that the single currency could unravel meshed with concern that the US was about to go into a double-dip recession, with knock-on effects for the global economy. The FTSE was down almost 200 points. Oil prices fell by 5%. The Swiss and Japanese central banks intervened. Gold rose to new record levels before falling back amid reports that hedge funds were selling their holdings to cover losses. Washington woke up to another scorching day and some brief respite from better than expected jobs figures. But those market graphs soon turned downwards again. The forecast from traders is for more stormy weather. Stock markets European debt crisis Financial crisis FTSE Dow Jones Global recession Global economy Banking Financial sector European banks Economics United States Larry Elliott guardian.co.uk

Posted by on August 5, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.