European, Asian Markets Plunge as Recession Fears Spread Worldwide

Britains announcement of an $880 billion bank bailout and coordinated interest rate cuts by central banks in North America, Europe and Asia were widely seen in financial markets as desperation measures that would do little to stabilize a banking system in the throes of the deepest crisis since the Great Depression.

The trading day opened with frenzied selling on Asian stock exchanges. Japans Nikkei index lost 9.4 percent, its biggest single-day fall since the global stock market crash of October 1987. Hong Kongs Hang Seng declined 8.2 percent, the Mumbai exchange fell 7.3 percent and markets in Indonesia had to close early after plunging 10 percentage points.

Japanese auto stocks fell sharply amid fears of a world recession and severe contraction in Japanese export markets. Toyota, Nissan and Honda all fell more than 10 percent.

Russias MISEX index fell 13 percent in the first minutes of trading and the Moscow exchange was suspended shortly thereafter.

European markets opened sharply lower, rallied somewhat after the announcement of coordinated interest rate cuts by the US Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the central banks of Switzerland, Sweden and China, and then resumed their downward spiral.

The pan-European Dow Jones Stoxx 600 Index ended the day down 6 percent. Londons FTSE 100 Index brushed aside the massive bailout package announced by the government and plunged 5.2 percent. Frances CAC-40 Index declined 7.4 percent and Germanys DAX Index fell 5.9 percent.

Early Wednesday morning, in one of the most far-reaching moves ever announced by a British chancellor of the exchequer, Alistair Darling pledged astronomic sums of taxpayer money both now and in the future to shore up the banks and building societies.

Capital will be made available to eight of the UKs largest banks and building societies in return for preference shares to be held by the government. Banks will have to increase their capital by at least £25 billion, which they can borrow from the government, with an additional £25 billion available in exchange for the preference shares.

This £50 billion is dwarfed by the £200 billion made available in short-term loans from the Bank of England, up from £100 billion, and the £250 billion in loan guarantees available at commercial rates, which are meant to encourage banks to lend to each other. This total is equivalent to $880 billion- greater than the $700 billion bailout agreed by the United States government October 3. It is equal to nearly 40 percent of Britains gross domestic product (GDP).

Even so, the FTSE 100 stock index in London fell four percent after the measures were unveiled, with the troubled HBOS banks shares rising by around 25 percentfrom a rock-bottom lowby the end of the day. Shares of Barclays and Standard Chartered both fell.

There will be no legislative process, Treasury spokesman Torsten Albig confirmed on Monday morning. Rather, the pledge signifies a clear political statement by the chancellor and finance minister.

Social Democratic Party (SPD) budgetary spokesman Otto Fricke said he believed that without a legal foundation such a guarantee was virtually worthless. The statement guaranteeing savings deposits is nothing more than a declaration of political intent, he said. It resembles the promise by [former labour minister] Norbert Blüm that pensions are safe. The pensions guarantee made by the Christian Democrat Blüm in the 1980s is regarded to this day as a classic example of a broken political promise.

Merkels and Steinbrücks promise of a guarantee of savings deposits is based on a daring economic calculationthat they will never be called upon to carry it out. It is meant to calm savers and small investors and prevent a run on the banks, which could lead to a collapse of the entire financial system.

If, contrary to their expectations, they were called upon to make good on their pledge, nobody knows what would happen. There are no funds or reserves to secure the assets concerned, whose sum has been estimated at more than a trillion euros. The only option would be to enormously increase the state debt, which in the past Steinbrück has always vehemently rejected.

Yesterday the Peoples Bank of China joined other major central banks around the world in an effort to steady international financial markets via coordinated interest rate cuts. More fundamentally, China continues to hold massive amounts of US debtalready more than $1 trillionwhich, as well as maintaining currency exchange rates, helps to shore up the US economy.

During a trip to the UN, Chinese Premier Wen Jiabao met leading American financial figures on September 24 to express his grave concerns at the unfolding financial meltdown. Those present included Timothy Geithner, president of the New York Federal Reserve Bank; Robert Rubin, Citigroup chairman and former US Treasury Secretary and Andrew Liveris, chairman of the US-China Business Council and of Dow Chemicals.

Wen declared that the most important commodity had become confidence in the American economy, saying it was more important than gold and currency. Dismissing comparisons with the 1930s Depression, Wen insisted that the situation was different because the US was now based on high-tech industries and therefore sound. He declared that Beijing was willing to cooperate to maintain US financial stability because that would be beneficial to China.

Look, were not an island. We cant pretend, and were not pretending that we will escape effects of world developments, said Harper this past Monday in response to a barrage of reporters questions prompted by the latest freefall on the Toronto Stock Exchange.

Harper, in the midst of a federal election campaign, has been hoisted on his own petard by the unraveling of the North American and, now, European economies. Only last week, during the French-language party leaders debate Harper had declared, Canada is not the United States. The situation is very different. The foundation of our economy is very solid.... .We do not have a crisis.

In truth, Harper and the Conservatives called the election last month with the cynical calculation that a recession could be held at bay until after the October 14 vote.

Thus, the Conservative Party campaign has highlighted the calm, prudent, stay the course leadership of the prime minister even whilst things have rapidly spun out of control south of the border. The economic and financial mess in the United States is disastrous, said Harper in last weeks English-language debate. The policies have been irresponsible. We have made very different choices in Canada. We are not bailing out our companies...