Global Trends by Martin Khor
Monday 13 August 2007
volatility in equity markets is transforming into a liquidity crisis
which last week also hit the ordinary investor when stock markets worldwide
fell steeply, and
in financial markets widened last week and spread across the world.
The turmoil is hitting more sectors, having moved from the
banks in Europe, the
The coming week will be crucial in whether the financial storms can be quelled, or whether they further evolve into hurricanes and cyclones.
Last week ended badly. On
Friday, many stock markets fell sharply. In Europe, the fall was an
average of 3%, with the
In the United States, the Dow Jones index fell 2.8% on Thursday and share prices were further plummeting on Friday until the central bank injected US$38 billion into the financial system (in addition to $24 billion on Thursday). As a result index closed only 31 points down to 13,239.
turmoil spread to
The extraordinary moves by the US and European central banks were an attempt stop the steep rise in shorter-term money-market interest rates that had shot above their target levels, resulting from increased demand for cash. The ECB’s target rate is 4% but the short-term interest rate had gone to 4.7%.
The conservative ECB’s intervention was so unexpected and stunning that a Financial Times columnist wondered whether “there is something truly nasty lurking out there in relation to credit losses that only the ECB knows about.”
showed up the seriousness of the situation, as more financial institutions
showed signs of being hit by the crisis that started in the “sub-prime”
house mortgage sector in the
biggest shock was the announcement on Thursday that the big French bank
BNP Paribas had stopped withdrawals from three of its investment funds,
which were exposed to the
The crisis has thus now affected the investing public, which is unable to redeem their investments from the affected funds.
said the freeze on the funds was due to the “complete evaporation of
liquidity” in certain market segments in the
Other investment funds have also been hit, according to the Financial Times. The North American Equity Opportunities fund run by Goldman Sachs fell 12% in July and another 12% in August so far. The big hedge fund Renaissance Technologies is also reported to be experiencing difficulties.
investment bank NIBC last Thursday also reported 2007 first-half losses
due to exposure to the sub-prime market. In early May, the Swiss Bank
UBS announced its affiliated fund Dillon Read had lost 150 million Swiss
publicised European institution hit by the “sub-prime crisis” is the
German bank IKB, whose affiliate Rhineland Funding had bought 14 billion
euros of bonds in the
Massive losses from its operations led to a German government-organized rescue including a 3.5 billion euro bailout plus 14.6 billion euro in liquidity guarantees, to be shouldered by other German banks. The chief German financial regulator said there was risk of the worst financial crisis since the 1930s.
The irony is that IKB had earned the praise of the rating agency
Moody in December 2006, for successfully diversifying its business activities
The last three weeks’ turmoil has led to uncertainties as to what lies ahead, and how the crisis will play out.
are finding it hard to deal with two big uncertainties,” said a Wall
Street Journal column. “No one knows how big the losses from
Paul Krugman in his New York Times column last week gave his view of
how the drying up of liquidity can produce a chain reaction of defaults.
“Financial institution A can't sell its mortgage-backed securities,
so it can't raise enough cash to make the payment it owes to institution
B, which then doesn't have the cash to pay institution C - and those
who do have cash sit on it, because they don't trust
liquidity dries up, the normal tools of policy lose much of their effectiveness,”
said Krugman. “Reducing the cost of money doesn't do much for borrowers
if nobody is willing to make loans. Ensuring that banks have plenty
of cash doesn't do much if the cash stays in the banks' vaults.”
Meanwhile, calls are being made to the financial authorities not only to act to stem the crisis but to investigate the parties responsible and to punish them.
Danny Schechter, editor of
MediaChannel.org, and director of the new film "In Debt We Trust:
America Before The Bubble Bursts”, said it is a matter of time before
the "sub-prime" credit crunch is seen for what it is: “a sub-crime
ponzi scheme in which millions of people are losing their homes because
of criminal and fraudulent tactics used by financial institutions that
pose as respectable players in a highly rigged casino-like market system.”
“We should demand criminal
penalties for the profiteers who started out to enrich themselves and
seem to have ended up destroying the very system they misused.”