LONDON, 11 August 2007 — While world stock markets dived for a second straight day yesterday on fears of a widening economic crisis, analysts downplayed the risk of a full-blown meltdown.
As the European Central Bank intervened again to boost flagging liquidity and European and Asian traders dumped shares on fears of a global credit crunch, economists stressed that the health of the world economy remained good.
“The underlying picture still looks reasonably good in terms of economic growth, in terms of corporate profitability, in terms of the balance sheets of companies,” said Henk Potts of Barclays Stockbrokers.
Investors have been alarmed by signs that losses in the US subprime mortgage market — high-risk property loans to which many US banks and investment funds are exposed — could spread to other regions.
BNP Paribas, France’s biggest bank, spooked the market on Thursday when it said it had suspended three investment funds exposed to the US housing market because it was unable to value its assets.
In European afternoon trade Friday, stock markets in London and Paris slumped by more than 3.0 percent, after Asian markets had closed down by between 2.0 and 4.0 percent.
Wall Street opens at 1330 GMT with analysts forecasting further falls for US share prices.
The fast-moving events of the last two days have forced economists to re-assess the risks to financial markets.
Philippe Waechter of Natixis Asset Management, who has downplayed the risk of a generalized economic meltdown amid the recent turmoil, told AFP yesterday that the BNP decision nevertheless gave cause for concern.
“With BNP Paribas, a major player in the international banking system has been affected, outside the United States. So we can’t rule out other major players also being affected, in Asia, Central Europe or elsewhere,” he said.
“If that happens, the growth on which everyone has been depending, saying ‘it will get better, the crisis is only temporary’ could be called into question, forcing central banks to adopt much more flexible monetary policies, and not simply providing liquidity to the market.” The European Central Bank, which on Thursday injected 95 billion euros into the euro zone banking market — its biggest such move since the Sept. 11, 2001 attacks on the US, released another 61 billion euros yesterday. The Federal Reserve and Japanese central bank have made similar interventions in the last 24 hours to ensure that money markets continue to function normally.
Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ, Ltd, said markets would welcome the decisive central bank action.
“It seems clear to us that the financial markets are in need of clarity and leadership and global central banks will need to act more concertedly in an attempt to re-instill confidence in the financial markets system.”
Gilles Moec, senior economist with Bank of America in London, said markets would at least be reassured by the fact that the burden of losses is shared around the world.
“Instead of having one big nasty piece of news that one big name has lost a lot of money, we have news that firms in the US, Australia or in the UK are reporting losses,” he told AFP.
“There is a paradox here because there is negative market sentiment, but at the same time the geographical spread of the losses shows that the risk has been well spread.”
Others agreed that the situation was not as dangerous as some paint it.
“Markets are set to remain volatile and this will provide some interesting opportunities for the selective investor,” said Tim Scholefield, head of equities at Baring Asset Management.
“Volatility is set to remain high for the foreseeable future. However, we see this prospect as an opportunity for the selective investor, rather than a challenge,” he added.