Fears over a global downturn intensified on Tuesday as stocks in Europe and around the world continued to slide amid panic that both the United States and Europe would be unable to stem their spiraling debt problems .
By mid-day, Germany’s blue-chip stock market index, the DAX, had fallen by more than 6 percent after a brief period of weak gains, while other world stocks slumped for the 10th session in a row, adding up to a 20 percent loss since May. Such a sustained period of losses has not been recorded since the 1990s, when the markets took a beating for a record 13 sessions.
“Not even in the global financial crisis did we see this extraordinary volatility,” RBS Australia’s head of Sydney sales trading, Justin Gallagher, told Reuters. Meanwhile, European Central Bank (ECB) Chairman Jean-Claude Trichet told a French radio station that the Continent was undergoing the worst crisis since World War II.
The losses around the world amount to some $3.8 trillion over the last eight days in what industry experts call a “bear market,” or a general stock market slump of about 20 percent. Gold prices also reached a record new high as investors opted to jettison endangered assets in favor of safe havens that also included the Japanese yen and the Swiss franc. More unwelcome news also came from China, where inflation has peaked.
Policymakers’ Credibility in Question
The situation followed Friday’s downgrade of the US’s sovereign debt credit rating by Standard and Poor’s. Despite pledges by leaders of industrialized nations to provide liquidity and stability to markets, stock prices around the world still proved highly volatile early this week. G-7 finance ministers and central banks pledged their support to markets on Sunday, but industry experts say the gesture offered too little, too late.
The problem is “not in credit, but in credibility,” Harvard University economist Kenneth Rogoff wrote in the Financial Times. “Markets can adjust to a downgrade of global growth, but they cannot cope with a spiraling loss of confidence in leadership and a growing sense that policymakers are disconnected from reality.”
Investors waited with anxious anticipation for a meeting of the US Federal Reserve Bank later on Tuesday, where they hoped new plans for market stimulus would be laid out by the central bank. But fears were also growing on this side of the Atlantic that the European Union would soon be faced with having to bail out Spain and Italy, even after the ECB announced a bond-buying program for both countries on Monday. But the short-term solution fueled ongoing concerns over the EU’s inability to hammer out a more comprehensive plan to end the euro crisis.
“The market is asking whether policymakers have many more bullets to fire,” Peter Hickson, the managing director of global commodity research at UBS, told Reuters.
On Tuesday, German commentators also question whether world leaders have any new ideas. Their tone betrays a nervousness that seems to match that of investors in the markets.
The conservative daily Die Welt writes:
“In these days of panic, investors are looking all over the world for a safe haven, but they haven’t found one. In Europe, the euro crisis is heading toward a new peak. For the first time in 70 years, the US has lost its reputation as the top-rated borrower, and also fears a renewed recession. … The Western world, which for decades had been accustomed to continuously increasing prosperity, is deeply shaken. The global economic crisis, which Germany overcame quickly and relatively unscathed, has suddenly returned. In many parts of the world, the crisis had never been overcome in the first place — instead, the real problems had merely been transferred from the banking sector to the state. Now politicians and central bankers are behaving just like the financial wizards responsible for the 2008 crisis: They are speculating with money that doesn’t belong to them — and no one can foresee the consequences.”
“The EU’s proposals to combat the crisis are based on allowing debt-addicted countries continued access to cheap money. But the probability that the Italians or Greeks will get off the drug of new state debt is low, if other Europeans are always there to provide them with new sources of capital. … It is high time that the self-proclaimed saviors of the euro recognize that the only thing that helps a drug addict is rehab — not more drugs.”
The center-left Süddeutsche Zeitung writes:
“An apocalyptic mood is spreading in the financial world that resembles the sentiment felt in the autumn of 2008 after the Lehman Brothers bankruptcy. Germany has seemed like the eye of the hurricane in the past few months. The economy is growing strongly, and unemployment is at its lowest since German reunification in 1990. German companies have been reporting record profits, and investors have been scrambling to buy German government bonds, which are regarded as one of the last safe havens in the sea of debt. ‘Angela in Wonderland,’ the Economist wrote earlier this year, describing Germany’s amazing comeback.”
“Now, however, there is a widespread feeling of alarm in Wonderland. If the financial markets’ bets turn out to be true, then Germany can expect tough times ahead. A new US recession is likely. Obama has few resources to ward off a downturn, because of the US government’s high debt levels. The same is true for many EU states, such as Italy but also France. Meanwhile, China’s economy is threatening to slow down. All these countries are among Germany’s largest trade partners. If growth there slows, it will hinder demand for German cars and heavy machinery.”
“But the greatest risk to the German economic miracle is ultimately the debt crisis in the euro zone. If other countries in addition to Greece were unable to service their debt, German banks would probably have to be rescued again with taxpayer money. For as strong as Germany’s industry may be, the country’s banks are not. … It is getting chilly in Wonderland.”
The Financial Times Deutschland writes:
“Right now the aim must be breaking the market psychology of the self-fulfilling recession prophecy. In Europe there is no one other than the issue banks that can achieve this. It is therefore correct for the ECB to buy up Italian and Spanish government bonds to provide the market with new liquidity.”
“The Americans must also make their own contribution: During Tuesday’s meeting, the Federal should decide on a third program to buy up US government bonds. In light of the already low interest rates, there it much else they can do.”
“Certainly this is risky, but what is the worst that could happen? If the investors were to turn their government bonds into cash immediately, they would likely put these billions directly into higher-yielding investments in emerging markets — thus fueling inflation. Then the emerging markets would have to work against this, at the expense of the economy. And that would merely serve to delay the downturn.”
“This is also not a pleasant scenario. But it is still far better than central banks simply standing by idly while everyone talks themselves into a worldwide recession and the share prices continue to fall.”
The conservative Frankfurter Allgemeine Zeitung writes:
“The downgrade of the US credit rating and the debt crisis in the European currency union obscure the fact that the global economy had already weakened significantly in recent months. Taken by itself, the slowdown had been interpreted as a subdued recovery and a slower way out of the global economic crisis — but not as a relapse back to rock bottom.”
“Many things that led to the economic slowdown early this year are of a temporary nature — such as production bottlenecks after the tsunami in Japan and the increase in oil prices. Despite the crisis-like aggravation of the financial markets it is still true that the negative influence of these factors will diminish in the coming months.”
“Experience shows that economies need years to overcome crises in the banking sector and return to normal growth rates. The US is no exception … but the world must live with the prospect that America will be more susceptible to recession than before.”
The left-wing daily Die Tageszeitung writes:
“Europe is on the right path to becoming a full currency union. … Since it’s founding the euro zone has suffered from being incomplete. It had a common currency, but nothing else. There were no uniform state bonds (Eurobonds) and no central bank that could buy these securities in the event investors panicked. Instead the ECB was given an incredibly limited mandate — namely that of fighting inflation and nothing more.”
“But that is changing. It serves as a signal that the ECB has begun to buy up government bonds from Spain and Italy. With that it is beginning to turn into a normal central bank.”
“But the current euro crisis won’t be the last. Because despite the fact that the ECB is gaining more power, it still isn’t a full-fledged central bank. There still aren’t any Eurobonds, and the purchase of Spanish and Italian bonds is a temporary measure. Still, it’s a start.”
— Kristen Allen, with wires