The impact of the sub-prime mortgage crisis quickly shown made itself felt beyond the United States. Losses were felt by investment banks as far afield as Australia. Firms cancelled bond sales worth billions of dollars, citing market conditions.
Seeking a long-term solution, the US government agreed a $700 billion bail-out that will buy out Wall Street's bad debts in return for stake in the banks. The US government plans to borrow the money from world financial markets and hopes it can sell the distressed assets back once the housing market has stabilized.
When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading central banks took the drastic step on October 8 of a coordinated cut in interest rates, with the Federal Reserve cutting its two main rates by half a point.
And after a week in which stocks declined almost 20 percent on Wall Street, European and American officials announced coordinated actions that included taking equity stakes in major banks, including $250 billion in investments in the United States. The action prompted a worldwide stock rally, with the Dow rising 936 points, or 11 percent, on October 13.
But as the prospect of a severe global recession became more evident, such gains were impossible to sustain. Just two days later, after Ben S. Bernanke, the Federal Reserve chairman, said there would be no quick economic turnaround even with the government’s intervention, the Dow plunged 733 points.
Credit markets, meanwhile, were slow to ease up, as banks used the injection of government funds to strengthen their balance sheets rather than lend. By late October, the Treasury had decided to use its $250 billion investment plan not only to increase banks’ capitalization but also to steer funds to stronger banks to purchase weaker ones, as in the acquisition of National City, a troubled Ohio-based bank, by PNC Financial of Pittsburgh.
The volatility in the stock markets was matched by upheaval in currency trading as investors sought shelter in the yen and the dollar, driving down the currencies of developing countries and even the euro and the British pound. The unwinding of the so-called yen-carry trade, in which investors borrowed money cheaply in Japan and invested it overseas, made Japanese goods more expensive on world markets and precipitated a steep plunge in Tokyo stock trading.
Oil-producing countries were hit by a sudden reversal of fortune, as the record oil prices reached over the summer were cut in half by October because of the world economic outlook. Even an agreement on a production cut by the Organization of the Petroleum Exporting Countries on October 24 failed to stem the price decline.
Stock markets remained in upheaval, with the general downward trend punctuated by events like an 11-percent gain in the Dow on October 28. A day later, the Fed cut its key lending rate again, to a mere 1 percent. In early November, the European Central Bank and the Bank of England followed with sharp reductions of their own.
Federal officials also moved to put together a plan to aid homeowners at risk of foreclosure by shouldering some losses for banks that agree to lower monthly payments. Detroit’s automakers, meanwhile, hard hit by the credit crisis, the growing economic slump and their belated transition away from big vehicles, turned to the government for aid of their own, possibly including help in engineering a merger of General Motors and Chrysler.
Economies around the world are affected by the credit crunch. Governments have moved to nationalize banks from Iceland to France. The leaders of 20 major countries, meanwhile, agreed to an emergency summit meeting in Washington on November 14 and 15 to discuss coordinated action to deal with the credit crisis.
(Agencies via China.org.cn, November 12, 2008)
