Investors Fear Moves By U.S., Europeans May Not Be Enough

By Kevin Sullivan and Edward Cody

Washington Post Foreign Service

Tuesday, October 7, 2008; D01

LONDON, Oct. 6 -- World stock markets suffered one of their worst days ever Monday amid fears that government responses to the global financial crisis, including the U.S. bailout and inconsistent moves by European leaders, would not be sufficient to prevent a worldwide recession.

The day opened with heavy losses in Asia and the Middle East, followed by record losses in Europe and sharp drops in Latin America before the closing bell finally sounded to end another dismal day on Wall Street.

Central banks continued to pump billions of dollars into money markets in hopes of unlocking seized-up credit markets. The Bank of England will inject an additional 40 billion pounds, equivalent to about $70 billion, on Tuesday, according to Alistair Darling, Britain's chancellor of the exchequer, or finance minister.

Tokyo's two main indexes fell to their lowest level in nearly five years. The Nikkei average was off 4.25 percent, and the broader Topix was down 4.67 percent. Markets in Hong Kong and Shanghai lost 5 percent of their value, and the Mumbai exchange was down more than 4 percent.

Saudi Arabia's stock market, the Arab world's largest, suffered one of its worst trading days on record, falling 9.81 percent. Even the exchange in Dubai, the Persian Gulf's roaring boomtown, ended 7.6 percent down.

In Europe, where ad hoc government responses to the crisis continued to confound investors, the Paris CAC 40 index finished down 9 percent, its largest single-day loss ever. London's FTSE 100 dropped 391 points, or 7.85 percent, its largest one-day drop since 1987. In Frankfurt, Germany, the DAX index was down 7 percent.

Russia's leading stock markets suffered record one-day losses, with the MICEX index losing 18.6 percent and the RTS 19.1 percent. Alarmed Russian officials were forced to halt trading on both exchanges to prevent an even worse free fall.

"It's a bit like swimming," Digby Jones, a British government economic official, told the BBC. "You don't know where the bottom is, whether it's a foot below you or 10 feet below you."

European financial markets were reacting in part to another day of what analysts called a disconnect between governments' rhetoric and actions. Much of it has hinged on whether the 27 European Union countries will act together or each on its own.

President Nicolas Sarkozy of France, which holds the rotating presidency of the European Union, announced late Monday that all 27 E.U. states had pledged to "take all necessary measures to ensure the stability of the financial system."

"In taking these measures, European leaders recognize the necessity of tight coordination and cooperation," Sarkozy said.

Finance ministers from the 15 eurozone countries -- those whose currency is the euro -- meeting in Luxembourg issued a statement Monday essentially affirming the statement from Sarkozy.

It was the second time in two days that Sarkozy had proclaimed European unity when the reality seemed much different.

Sarkozy has called for a coordinated continent-wide response to the crisis but could not win agreement for such a plan at a summit Saturday in Paris with the leaders of Britain, Germany and Italy; he said after that meeting that while nations would respond individually, they would act "in a coordinated way."

But, as the French newspaper Le Monde commented on its Web site Monday, "the facade of unity lasted less than a weekend."

Officials at the summit had been critical of Ireland, which last week guaranteed all deposits in the country's six largest banks without consulting its neighbors. Banks in other European countries complained that the move could create unfair competition and cause depositors to switch to Irish banks.

On Sunday, German Chancellor Angela Merkel, who had been critical of Ireland's action, created massive confusion in Europe by appearing to say that Germany would guarantee all $786 billion in German bank deposits. "We want to tell savers that their deposits are safe," Merkel said. "The government will vouch for that."

Speaking in the British Parliament on Monday, Darling tried to calm the confusion created by Merkel's statement by calling it a "political declaration" that was not "legally binding." Darling had said on Sunday that he was "looking at some pretty big steps" as Britain considered its response to the crisis.

Iceland, Denmark and Sweden, meanwhile, announced special deposit protection plans Monday, joining Greece, Spain and Austria. Britain last week announced it was raising the amount of insured deposits.

In his much-awaited Parliament speech Monday, Darling stressed mainly that he would do "whatever is necessary to maintain stability" in financial markets. He gave no details.

"The one option Darling didn't have was to do nothing, but apparently he thought that was an option," said Alex Potter, a banking analyst at Collins Stewart in London. Potter said Darling's assertion that he would keep "all options open" was "laughable."

"It's all very nice he is having meetings -- but we need to see him do something," Potter said, adding that Europe's fragmented approach to the crisis had an "incredibly damaging" impact on markets Monday.

New York Mayor Michael Bloomberg, visiting London on Monday, urged British and U.S. officials to use caution when creating new regulation of financial markets.

Although both countries need to promote more transparency in financial dealings, he said, "rather than more regulation, I think what we need is smarter regulation." Bloomberg said a government overreaction that leads to excessive regulation could strangle the world's two most important financial centers, New York and London.

"There are plenty of emerging financial capitals that are gunning for us: from Dubai to Shanghai, and from Sao Paolo to Singapore," Bloomberg told a gathering of government and financial officials.

As the crisis continued to spread Monday, it roiled markets from the world's richest regions to some of its poorest.

Kuwait's stock exchange, the Middle East's second largest after Saudi Arabia's, sank by 3.45 percent. In the United Arab Emirates, Abu Dhabi's exchange dropped 5.6 percent.

Until recently, Persian Gulf leaders were mainly worried about how to wisely handle record oil profits as oil passed $140 a barrel. But now liquidity problems, withdrawal of foreign cash and fears of sagging demand for oil all were bringing the crisis home.

On Monday, crude oil fell below $90 a barrel, its lowest price since February, creating new worries for the region's leaders. Falling oil prices also were a factor in Monday's market dives in Russia, another country where wealthy investors and banks have suddenly found themselves caught in the economic contagion.

In Iceland, the government acted Monday to avoid what Prime Minister Geir Haarde said was a potential "national bankruptcy."

The country guaranteed all bank deposits and gave the nation's financial regulator broad powers to control operations of private banks.

Once strictly a fishing nation, Iceland has become a wealthy banking center in recent years.

"We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy," Haarde said in a nationally televised address. "The legislation is necessary to avoid that fate."

In Latin America, the biggest stock market drop occurred in Brazil, the region's largest economy, where authorities halted trading twice during the day but could not prevent a decline of more than 10 percent. The Bovespa index fell more than 15 percent, the sharpest drop in a decade, before hovering around 10 percent down by the afternoon. Stock markets in Argentina, Mexico and Chile also suffered significant losses.

There was widespread concern that the worldwide financial crisis would slow demand for the wide range of commodities exported in the region. Brazil leads the world in production of sugar, coffee and orange juice.

Cody reported from Paris. Correspondents Mary Jordan in London, Craig Whitlock in Berlin, Joshua Partlow in Rio de Janeiro, Rama Lakshmi in New Delhi, Ellen Knickmeyer in Cairo and Blaine Harden in Tokyo and special correspondent Karla Adam in London contributed to this report.