US financial crisis; global recession deepens
The financial crisis in the United States which started with the
crisis in the sub prime lending market, nearly a year ago deepened last
week.
On Monday, the financial crisis toppled the giant US investment bank
Lehman Brothers threatening the survival of the world’s biggest
insurance company AIG.
After US Federal Reserve Bank pumped $85 billion to rescue the AIG,
the risk of the worldwide recession deepened and by Wednesday
selling-off spread to Asian markets. Panic-stricken investors started to
sell shares and buy bonds, gold, oil and other commodities.
“It’s panic, investors were running for cash and assets such as
Treasuries that they thought would be safe. Markets in Asia were pricing
in “pretty extreme scenarios” that matched the crash of October 1987.
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Financial experts (from L) Yoon Je Cho of South Korea’s Sogang
University, Charles Adams of the National University of
Singapore and former International Monetary Fund (IMF) official
and Chee Sung Lee, IMF Asia-Pacific regional director arrive at
the Asian Development Bank (ADB) forum in Manila on Thursday to
discuss the current turmoil in the international financial
markets. Experts warned that Asia could get hit hard by the US
financial crisis despite limited direct exposure to instruments
linked to sub-prime mortgages. AFP |
“That’s within the memory [of many people in the market]. If it’s out
of memory, then there are no guideposts,” according to the Financial
Times quoting Malcom Wood, Asia-Pacific equity strategist for Morgan
Stanley in Hong Kong.
Market analysts said that the $85 billion Fed injection to rescue AIG
failed to curb the surge in risk aversion and markets were hit by a
fresh wave of anxiety.
One cause for fear came when shares in a supposedly safe money market
mutual fund fell below par value.
All thought that profit was abandoned as traders piled into the
safety of short-term Treasuries, with the yield on three-month bills
falling as low as 0.02 per cent - rates that characterised the “lost
decade” in Japan.
The last time US Treasuries were this low was in January 1941.
(Financial Times UK )
The crisis has already hit the world’s largest companies. Share
values of Morgan Stanley and Goldman Sachs, the two largest independent
US investment banks fell 24 per cent and 14 per cent as the cost of
insuring their debt soared, threatening their ability to finance
themselves.
HBOS, a leading UK mortgage lender pressed into sales talks by the
government after its share price halved this week, agreed to a £12bn
takeover by Lloyds TSB.
The Federal Reserve, working with central banks in Europe, Canada and
Asia, pumped as much as $180 billion into money markets on Thursday to
combat a seizing up of lending between banks that is intensifying the
global financial crisis.In a statement, the Fed said it had authorised
the expansion of swap lines, or reciprocal currency arrangements, with
other central banks, including amounts up to $110 billion by the ECB and
up to $27 million by the Swiss National Bank.
The Fed also said new swap facilities had been authorised with the
Bank of Japan for as much as $60 billion; $40 billion for the Bank of
England and $10 billion for the Bank of Canada.
The Fed action increased lines of cash to central banks by $180
billion to $247 billion.
It was the latest chapter in the worst financial upheaval since the
Great Depression. For more than a year, investors around the world have
watched with growing alarm as the US economy, the world’s largest, has
struggled to correct itself before being tipped over the edge by massive
foreclosures, shrinking consumer spending and rising inflation.
GW |
