By Jason Simpkins
Major indices around the world plunged yesterday (Monday), as the credit crisis picked up momentum in Europe and markets in Asia began bracing for a deep recessionary environment in the West.
The Dow Jones Industrial Average careened below 10,000 points for the first time since 2004 yesterday, after plummeting 500 points in the first hour of trading. The Dow closed down 369.88 points, or 3.6%, on the day at 9,955.50, after earlier surrendering as much as 800 points.
The Dow has shed more than 1,100 points, or about 10% in slightly more than a week, and the S&P 500 has lost more than 15% in the same period.
Indices around the world suffered similar declines. London’s FTSE 100 index closed down 5.6% yesterday. Germany’s DAX was down 5.2%, and the CAC-40 in Paris lost 5.9%. In Asia, the Nikkei 225 stock average in Tokyo fell 4.3%, the Hong Kong’s Hang Seng index slid 5%, and China’s CSI 300 Index slumped 5.1% coming off a one-week holiday.
The credit crisis that originated in the United States last year has clearly infiltrated economies in Europe and financial institutions throughout the region are beginning to topple.
France's BNP Paribas SA (OTC: BNPQY) became the Eurozone's largest bank by deposits after agreeing to buy Fortis NV's Belgium and Luxembourg divisions, just days after it was partially nationalized by the government of the Netherlands as part of a $16.4 billion resuce plan.
Trading of Fortis shares was suspended Monday after falling to $7.50 on Friday. The company's shares have plunged roughly 70% this year.
Sunday, the German government was forced into a $68 billion (50 billion euro) rescue of Hypo Real Estate Holding AG – the nation’s second-biggest commercial property lender.
HRE was torpedoed by short-term financing struggles within its Dublin-based subsidiary, Depfa Bank PLC.
Hypo Real Estate fell as much as 76% in Frankfurt trading.
In Italy, shares in bank giant UniCredit SpA were suspended several times yesterday, after the company announced its decision to raise 6.6 billion euros in fresh capital – something the UniCredit’s board previously said it would not do.
“We made some mistakes in evaluating the market scenario, that's absolutely clear to us,” Chief Executive Officer Alessandro Profumo told Bloomberg News. The company said “waves of market turbulence,” as well as an “unprecedented lack of trust among financial institutions” forced management’s hand.
The fresh round of European collapses was the second domino to fall behind an American contagion that claimed The Bear Stearns Cos. Inc. and Lehman Bros. Holdings Inc. (OTC: LEHMQ), and forced a bailout of mortgage giants Fannie Mae (FNM), Freddie Mac (FRE) and American International Group (AIG).
"," Mark Tan, who helps manage about $20 billion of equities and bonds at UOB Asset Management in Singapore, told The Associated Press. "The problem now is that the lack of foreign confidence could affect the Asian consumer, which would lead to a bigger slowdown in Asia than expected."
Central Bank Panic
A round of chaotic collapses over the weekend spurred central banks and policymakers around the world into action.
German Chancellor Angela Merkel guaranteed private deposit accounts in a desperate bid to restore confidence after the rescue of Hypo Real Estate. Austria, Denmark, Ireland, and Sweden have all raised the limits on guaranteed savings, and there is growing speculation that the United Kingdom will soon join them.
However, Germany’s decision, in particular, came as a surprise as it came just one day after Chancellor Merkel joined French President Nicolas Sarkozy, U.K. Prime Minister Gordon Brown, and Italian Prime Minister Silvio Berlusconi in condemning Ireland’s decision to offer blanket protection for its deposits.
In fact, EU competition authorities had already agreed to challenge Ireland’s decision as a competition distorting measure.
“It would have been advisable to properly consult other EU authorities on the envisaged legislative plans,” the European Central Bank said yesterday. The ECB is also concerned the guarantee provides the lenders covered by the scheme with “preferential treatment.”
The ECB, the Bank of England and the Swiss National Bank offered more than $60 billion to markets yesterday, hoping to ensure that the financial sector remains well oiled.
The ECB offered $50 billion in overnight money, while the Bank of England offered $10 billion.
Financial institutions borrowed $33.9 billion (24.6 billion euros) on Oct. 3 – the most since February 2001.
Meanwhile, back across the pond, the U.S. Federal Reserve said it would make hundreds of billions of dollars more available through its Term Auction Facility (TAF). The Fed said it would expand its 28-day and 84-day TAF operations to $150 billion each. The central bank will also begin paying interest on bank reserves.
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- Associated Press: