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Global market wrap: In search of stability

  • Wall Street dropped another 5.1% overnight, taking the total five day drop to 13%.
  • Australian markets followed that trend this morning, falling over 4% in the first half hour of trade.
  • Japan’s Nikkei continued to slide yesterday, adding a fall yesterday of 3.5% to Monday’s 4.25%.
  • Russian markets opened four hours late following Monday’s 18.7% plunge and three trading halts.
  • After a fall of 9%, France’s CAC index held its ground overnight, finishing up 6%
  • Germany also stemmed the losses incurred on Monday, registering a 1.12% fall on the back of Monday 7% loss.
  • New Zealand’s NZX-50 index .NZ50 has fallen 1.8% in early trade.

And the news is still bad and getting worse in Iceland. The crisis there has snared depositors in a UK arm of an Icelandic bank after the government nationalised Landsbanki its second largest bank, guaranteeing domestic deposits, sought a $US5.4 billion loan from Russia (itself in the midst of terrible strains) and tried to peg its currency.

News reports said a team from the International Monetary Fund is already in the Reykjavik but the Fund had yet to be asked by the Government for help.

The country’s largest bank, Kaupthing, will be given a $A1 billion loan from Iceland’s Central Bank, which Monday guaranteed all savings for Icelandic customers.

Around 150,000 people in the UK have savings with Landsbanki’s Icesave and Kaupthing Edge, the UK retail arm of the Icelandic bank. Icesave says it’s stopped processing requests to withdraw money and taking on new customers.

In Spain the Government announced that it will boost its guarantee for deposits in its banks to 100,000 euros ($A189,000) and set up a 30 billion euro ($A56.7 billion) fund to buy assets from banks and keep credit flowing to the economy.

Prime Minister Jose Luis Rodriguez Zapatero told a news conference the guarantee was double the minimum agreed at that European finance ministers’ meeting in Luxembourg earlier on Tuesday.

Spain’s banks have been better regulated than elsewhere in Europe, have so far been spared the havoc generated by the subprime/CDO disasters that have crippled banks in the US, UK and Germany.

But now the central bank, the Bank of Spain has said for the first time that the country’s banks could be forced into mergers.

The government says the bail out fund can be expanded to 50 billion euros. It will buy assets from banks in order to ensure they keep lending.

Russia said it would pump an extra $US37 billion in long-term subordinated loans into state-controlled banks in a new measure to fight off a deepening financial crisis that has seen the biggest ever losses on the Russian stock exchange.

The money will be pumped in via five-year loans to the two biggest state banks, VTB and Sberbank. the decision was announced after an emergency meeting between the government and the heads of the biggest state banks to discuss what he called “a large scale financial crisis”.

The move came after the mainly US dollar denominated RTS Index posted its steepest loss in its 13-year history on Monday, losing 19.1%, while the rouble-denominated Micex fell 18.7%.

How the pundits see it:

EU Ministers approve broad measures to combat evolving crisis. The 27 members of the European Union approved measures Tuesday aimed at highlighting their determination to combat a spreading banking crisis together. Still, while the EU finance ministers agreed to raise the guarantee for bank deposits, they could not settle on a common level.  — International Herald Tribune

Lessons from the sell-off. Well, it’s finally sinking in. Yesterday’s global stock selloff is best understood as the recognition by investors that the financial panic is world-wide, and moreover that it almost certainly means a global recession. As bad as the carnage is and will be, this isn’t the end of days. It might even be clarifying if it causes economic policy makers to abandon some of the illusions that have guided them for the past 14 months.  — Wall Street Journal

Are we depressed yet? A grisly banner was held aloft the other day at a demonstration on Wall Street. Its graphic message advised denizens of the street to “Jump!” It was a frightful reminder of perhaps the most widely believed legend about the Great Depression of the 1930s; that the sudden collapse of the economy filled the sky with the falling bodies of suicidal stockbrokers. As a matter of fact, there were very few such suicides. But the myth captured a deeper truth. Except for the Civil War, no event in American history proved more traumatic. It left scars that are with us today.  — Los Angeles Times

Doctors must stop squabbling over the patient. An experienced and very senior figure in global central banking, someone not given to alarmist observations about the customarily prosaic business of his profession, described the state of the world’s financial system to me over the weekend as like that of a patient who has experienced multiple organ failure. The market for securitised assets collapsed some time ago. The interbank lending market is flatlining. The commercial paper market is shutting down. The world is in danger of losing the financial equivalent of its circulatory, respiratory and central nervous systems. Of course, the analogy is not quite right. The world economy is not about to die. How is that for good news?  — Times Online

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