NEW YORK, 17 August 2007 — World leaders insisted that the US credit crunch would not cause an economic crisis but stock markets across the world plummeted yet again as investors remained unconvinced.
The largest US mortgage lender, Countrywide Financial Corp. tapped out a $11.5 billion credit line and another lender stopped funding home loans as companies scrambled for cash and credit markets seized up. At one point, Countrywide’s shares were down as much as 30 percent.
“It’s fear and panic,” said David Bianco, chief US equity strategist at UBS in New York. “People are beginning to lean toward outlooks now of all the dominoes falling, that the US economy slides into recession because of this credit crunch, and it has an adverse impact on the global economy and even the globally exposed sectors.” First Magnus Financial Corp., the 16th-largest US mortgage lender, said it stopped funding home loans and taking mortgage applications. It cited the “collapse” of the secondary market where lenders typically would try to resell mortgages to generate more cash for future lending.
National City Corp., a big Cleveland-based bank, folded its home equity unit into its main mortgage unit to save money, resulting in job cuts.
The blue chip Dow Jones Industrial Average index regained substantial lost ground after tumbling over 300 points in earlier trading. The Dow finished down 14.47 points (0.11 percent) at a preliminary close of 12,847.00 just after the closing bell was rung at the New York Stock Exchange. It was the sixth straight day of losses for the Dow. The NASDAQ composite ended 7.76 points (0.32 percent) lower at 2,451.0.
US Treasury Secretary Henry Paulson admitted that American growth will be hit but said the economy would weather the storm because it came “against a backdrop of a very healthy global economy with strong fundamentals.”
The White House said it expected to see continued US economic growth, but would not comment on the recent financial market declines.
French President Nicolas Sarkozy said he was confident the fallout from US credit markets would have no long-term effect on growth, while Australia’s Prime Minister John Howard said the economy could withstand the shock. But their words failed to convince stock markets. They tumbled yet again, wiping tens of billions of dollars off share values in Asia and Europe. From London to Hong Kong, Tokyo and Sydney weary traders’ screens were awash with red again.
The FTSE 100 index of leading British shares lost 4.10 percent to close at 5,858.90 points, its lowest closing level since Sept. 25. Gains by the index in the last 11 months have been wiped out.
In Paris, the CAC 40 index showed a loss of 3.26 percent at 5,265.47 points at the close, its lowest level this year, while the Frankfurt Dax fell 2.36 percent to 7,270.07 points. “Investors are in the dark about the consequences of the crisis and its potential impact on the economy,” said a Paris-based dealer who asked not to be named. “There was no bad news today but worries about the risk of contagion are persistent.”
Sarkozy urged the Group of Seven industrial countries to better monitor international financial markets. Sarkozy’s appeal, in a letter to German Chancellor Angela Merkel, was made public yesterday.
Sarkozy has repeatedly sought a greater role for governments in managing the economy and has notably sought to wrest some control of monetary policy from European Central Bank regulators.
In the letter, also sent to other G-7 leaders, Sarkozy also called on the group to investigate the role of rating agencies in identifying risks that would lead to financial market crises. Merkel is the current president of the G-7. Sarkozy added that countries should also ensure that their “alert systems” are effective and that cash could be made available in case of unforeseen events in credit markets.
