Global crash fears as German bank sinks
"'The [Bush] Administration has two lines of action: tax relief for the rich [and] reliance on the
Federal Reserve. Both are without effect,' says US economist
JK Galbraith in an interview with The Observer."
Faisal Islam, economics correspondent and Will Hutton
Sunday October 6, 2002
The Observer
Stockbrokers around the world are braced for a potentially
calamitous week as alarm mounts over a looming, Thirties-style
global financial crisis. A leaked email about the
credit-worthiness of Commerzbank, Germany's third largest
bank, yesterday increased fears of the international stock
market malaise exploding into a fully-fledged banking crisis.
Commerzbank lost a quarter of its value last week, raising the
spectre of Credit-anstalt, the Austrian bank that collapsed in
1931, sparking global depression.
US stock markets have fallen for six consecutive weeks, to their
lowest levels in five years. European markets have collapsed
even further, wiping out nearly half of the value of European
corpora tions in this year alone. Japan is struggling to put
together a plan to save its banking system, riddled with bad debt
after a decade of recession and falling prices. Now the German
economy threatens to follow.
'There are strong parallels to the Thirties after an unsustainable
"new era" boom,' says Avinash Persaud managing director for
economics and research at State Street Bank. 'Then, the stock
market decline was not just steep, it was long, taking three
years to reach the bottom.'
'Commerzbank being affected is a sign of the severity. But in
today's crisis risks have been offloaded from the banks to the
markets and ultimately our pensioners, which makes the
problem more difficult to deal with,' he says. The leaked email
about Commerzbank was in response to an inquiry from a US
investment bank about rumours of huge losses on credit
derivatives, which aim to spread risk.
Figures due to be published on Friday will show that a toll of
stock market falls, rising joblessness and war fears is finally
denting the spending habits of Americans. Economists fear that
the result may be a 'double-dip' US recession, taking much of
the world with it.
Europe's finance Ministers, including Chancellor Gordon Brown,
will meet in Luxembourg on Tuesday amid deepening concern
about the stability of the financial system. Tomorrow evening,
the Eurogroup of finance ministers, excluding Brown, will
discuss reforming Europe-wide tax and spending rules along the
lines of the British system, taking stronger account of economic
difficulties.
In the US, the concern is that Alan Greenspan, chairman of the
US Federal Reserve, has insufficient room to cut interest rates if
the economy falls into recession. 'The [Bush] Administration has
two lines of action: tax relief for the rich [and] reliance on the
Federal Reserve. Both are without effect,' says US economist
JK Galbraith in an interview with The Observer.
guardian.co.uk |
