Capitalism Under a Rock

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
corpora tions 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.