Firestorm sweeps world markets Marc Moncrief and Michelle Grattan October 11, 2008
Illustration: Ron Tandberg NOT for more than 20 years have Australian shareholders seen a day as bleak as yesterday, as more than $90 billion was torn out of the sharemarket as crisis meetings of the world's financial leaders began in Washington. In a rout that spanned the globe, the value of Australia's largest 200 companies, as measured on the S&P/ASX 200 Index, fell below $1 trillion for the first time since 2006. It was the worst percentage hit to Australian shares since the crash of 1987. Hedge fund manager Tom Elliot called it "capitulation day". Meanwhile, the domestic row over what should be done sharpened, with Opposition Leader Malcolm Turnbull calling for the Government to guarantee bank deposits at least up to $100,000; extend from $4 billion to $10 billion the funding it is injecting for home loans by small lenders; and delay the start of the planned emissions trading scheme. Prime Minister Kevin Rudd reassured depositors that everything necessary was being done and the system remained strong. The Government has had in train for some time a proposed scheme to guarantee deposits up to $20,000, which would cover 85% of depositors. Mr Rudd also moved to curb the backlash stirred when he left open the possibility of deferring a rise in the base pension beyond the May budget. He promised yesterday the Government would give assistance to pensioners by the budget. The rout took place as the International Monetary Fund and the Financial Stability Forum held an emergency meeting of officials from 27 countries to discuss the crisis. The IMF's first deputy managing director, John Lipsky, said the meeting would help emerging economies such as China cope with the pressures caused by the turmoil. President Bush was due to make a televised address overnight to soothe upheaval on financial markets. He will meet with finance ministers from the G7 on the weekend. As he prepared for a separate meeting of finance ministers from the G20 (which includes developing countries), Treasurer Wayne Swan said it was vital for advanced and developing countries to come together because the crisis was "also now impacting on developing economies and slowing world growth". Mr Swan said being "at the epicentre of this global firestorm" underscored to him that the key challenge was to restore confidence on a global basis. Co-ordinated action would be needed across a range of areas, going beyond interest rates, with developed and developing countries working together. Mr Rudd said the G20 meeting, called this week by US Treasury Secretary Henry Paulson, was "critical to deal with the challenge of long-term regulatory change to the financial system. "That's in turn critical to restoring confidence to markets, and that's where Australia and the United States are working closely together," he said. After a dramatic week on the world's investment markets and desperate, co-ordinated action by central banks, investors had hoped Thursday would bring some calm. New York's Dow Jones Industrial Average - a benchmark of US shares - began the day with positive momentum, but plummeted in the last two hours of trading. The index lost a phenomenal 7.3% on the day, closing below 9000 points for the first time since 2003. The pessimism spread from Wall Street to Australia and on to Asia. Japan's Nikkei 225 Average lost 9.6% on the day and Hong Kong's Hang Seng Index fell by 7.2%. London's FTSE 100 fell 10% the moment it opened. Yesterday's 8.3% gutting of Australia's share index capped a three- week drubbing that has slashed about $260 billion from the value of the nation's top 200 companies. The US and Britain appear to be converging on a blueprint for stemming the financial chaos as they prepare for the crucial talks of financial leaders in Washington that the White House hopes will result in a more co-ordinated response. The British and American plans, though far from identical, have two common elements: injection of government money into banks in return for ownership stakes, and government guarantees of repayment for various types of interbank loans. There is a growing consensus that the crisis is so fast-moving and harmful that it demands an unprecedented degree of worldwide co- ordination. British Prime Minister Gordon Brown made the case, in a letter to French President Nicolas Sarkozy, for another option gaining favour among economists - guaranteeing short and medium-term loans between banks - to jump-start the banks' lending. The White House confirmed that the US Treasury Department was considering taking ownership positions in banks as part of its $US700 billion rescue package. But officials said the idea was less developed than the plan to buy distressed assets from banks through "reverse auctions". The goal, Treasury officials said, was a plan that would be broadly available to all banks, rather than through specific rescue packages negotiated case by case. Direct injections of cash would be for comparatively healthy banks. If a bank is failing and needs to be rescued or shut down, the Federal Deposit Insurance Corp would handle it through its own procedures. The Treasury proposal to recapitalise banks stems from the realisation that as the sharemarket keeps tumbling, and as mortgage-related securities on banks' balance sheets also plummet, it has become harder for banks to raise fresh capital from investors. It is far from clear that other countries will accept the need for wholesale recapitalisation of the banks. Even if they did, neither the British nor the American plan would necessarily be a template. Mr Swan expressed his confidence that Australia was "better placed than almost any other developed economy" to withstand the fallout. Addressing the Brookings Institute in Washington, he said: "We have one of the strongest financial sectors in the world." He called for international co-operation to improve global regulation. "The answer lies not in more or less regulation, but in better regulation," he said. With AGENCIES, ANNE DAVIES --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. 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