Deepening finance crisis causes global market panic

October 07 12:05:01 PM, Yahoo News

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City. Desperate new measures by governments in Europe and North America to stabilise the financial system failed to stop panic selling that swept global markets Monday amid deepening gloom at the scope of the banking crisis.(AFP/Getty Images/Spencer Platt)

AFP - Desperate measures by governments in Europe and North America to steady the banking system failed to stem panic selling in global markets Monday amid deepening gloom at the scope of the financial crisis.

Nothing seemed to stop stock markets taking, in many cases, record falls.

Nigel Gault at Global Insight said the markets were seeing a realization of "the worst fear," namely "that the financial crisis and the slowdown in economic growth would reinforce each other, dragging the economy into recession, perhaps a severe one."

In Washington, Treasury officials said they would act quickly to implement a massive bailout plan for the financial sector, seeking bids by Wednesday for managers of toxic real estate assets at the root of the crisis.

The Federal Reserve and Treasury said they were studying the possibility of making unsecured loans in an effort to keep credit flowing in the financial system.

Wall Street came back from the edge of the abyss in a highly volatile session and European shares were hit hard in a round-the-world rout.

The Dow Jones Industrial Average fell as much as 800 points during the session, slipping below the key psychological level of 10,000 for the first time since 2004. The blue-chip index closed down 369 points (3.58 percent) at 9,955.50.

The Nasdaq skidded 4.34 percent and the Standard & Poor's 500 index lost 3.85 percent, halving early losses.

The partial comeback on Wall Street was the only modest glimmer of hope in an otherwise horrific day for global markets.

"When will the slide end? It's anybody's guess," said David Kastner at Charles Schwab & Co.

"But the aggressive actions being taken by the Fed, and increasingly by the central bankers in Europe and Asia, point to an eventual stabilization in confidence -- where the real crisis lies. In the meantime, we expect sharp bouts of bargain hunting and more panic sell-offs."

In Iceland, Prime Minister Geir Haarde said the government was ready to take control of the country's banks, citing "a gargantuan crisis, which is part of a broader worldwide crisis" but were divided on a US-style bailout.

After a weekend summit of the European Union's big four leaders in Paris, member states' leaders issued a joint statement on Monday vowing to defend banks but remained divided on a US-style bailout fund.

"This is precisely why investors have become nervous over the capabilities of European officials to deal with the credit crunch in a coordinated, EU wide manner," said Andrew Busch at BMO Capital Markets.

"Each action appears to be country-centric with no over-arching solution like in the United States."

Russia's RTS stock market closed down 19.10 percent in its worst fall in history. Indonesian shares fell more than 10 percent and trading in Brazil's stock market was suspended after massive declines of 15 percent, before the index pared its loss to 5.43 percent.

The London FTSE 100 index of leading shares fell 7.86 while in Paris the CAC 40 index shed 9.04 percent, its heaviest one-day loss since its creation in 1988.

The Frankfurt DAX lost 7.07 percent. In Dublin the Irish stock exchange's main ISEQ index ended with a loss of 9.59 percent, with banks taking the hardest hit.

European governments appeared divided on whether guaranteeing all deposits was the best way to safeguard confidence, and the EU commission called on member states for better coordination.

Denmark, Portugal and Iceland guaranteed deposits, emulating Germany on Sunday and Ireland and Greece last week, adding pressure on other European governments to follow suit.

British Prime Minister Gordon Brown called a meeting of his "economic war cabinet." Finance minister Alistair Darling said the government would consider extending insurance guarantees.

Amid the turbulence, the euro fell to a 14-month low of 1.3441 dollars. Oil prices slipped below 90 dollars a barrel amid fears of a global downturn.

The turmoil emerged after the collapse of loans to would-be US homebuyers with dark credit histories and caused a chaotic chain reaction, revealing how cheap credit throughout the financial system had created a massive bubble.

The US government approved a law Friday to buy up 700 billion dollars of bad mortgages and other assets from banks, freeing them up to start lending again.

"The bank bailout has not worked," said economist Peter Morici at the University of Maryland.

"The bank bailout will provide banks with much-needed liquidity but it does not address the compensation and management practices on Wall Street that drove irresponsible decisions and gave rise to the crisis."

A few analysts tried to keep a brave face.

"Let's try to rise above this depressing deluge of doom and review why the world might not come to an end, although it sure looks bad this morning," said Ed Yardeni at Yardeni Research.

"There is an enormous amount of liquidity parked in liquid assets with near-zero interest rates. Stocks are ridiculously cheap if the world isn't coming to an end."

Central banks continued to pump tens of billions of dollars into interbank money markets that are now essentially on life-support from state institutions because commercial banks are too frightened to lend to each other.

In a bid to increase liquidity, the US Federal Reserve said it would begin to pay interest on bank deposits for the first time and expand its refinancing operations for commercial banks to 900 billion dollars by year-end.

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