http://www.observer.co.uk/economy/story/0,1598,805683,00.html
Global crash fears as German bank sinks
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 corporations 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.