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The global sharemarket meltdown which gathered fresh momentum this week is stoking fears the worst financial crisis in decades may widen into a far more damaging global economic crisis.
As expected, US stocks plummeted when Wall St opened for business on Monday [US time] after a weekend that saw the country's fourth largest investment bank Lehman Brothers file for bankruptcy, another investment bank Merrill Lynch offer itself for sale to Bank of America to avoid a similar fate, and insurance giant American International Group narrowly stave off failure by securing a US$20 billion ($30.7 billion) lifeline from government sources.
The Dow Jones index posted its biggest one-day points drop since its first day of trade after the September 11 attacks, losing 504.48 points or 4.42 per cent to end the day at 10,917.51, its lowest close in more than two years. The S&P 500 lost 4.71 per cent and the Nasdaq lost 3.60 per cent.
The sell-off was worsened by the realisation that the US government was unlikely to bail out troubled financial institutions in future.
"I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers," Treasury Secretary Henry Paulson said.
Traders were nervously eyeing short-term prospects, including Asian markets which opened yesterday after holidays on Monday. It was feared that a continuing sell-off in Asia would in turn spark further selling on the US market this week.
Those fears proved well founded with Japan's Nikkei index sliding 5 per cent, or 605.04 points, to 11,609.72, its lowest close since July 2005.
Hong Kong stocks also fell with the blue-chip Hang Seng Index down 5.4 per cent by the close.
The Australian market fell 66.9 points, or 1.39 per cent, to 4750.8 with again much of the damage inflicted on its banks.
Infrastructure investor Babcock & Brown lost a third of its value as investors bet the fund manager won't be able to repay A$9.6 billion ($11.5 billion) of debt.
Babcock plunged 34 per cent at the close of trade, cutting the firm's market value to A$364 million from A$8.9 billion at the start of the year.
After shrugging off most of the tide of negative sentiment on Monday, the New Zealand market played catch up with Wall St, falling 92.60 points or 2.79 per cent. At one point it appeared likely to post its biggest one-day fall in six years.
However Guy Elliffe, head of equities at New Zealand's fund manager AMP Capital Investors, was not panicked by Wall St's woes.
"I think the direct implications are relatively modest in terms of actual New Zealand companies that own AIG or Lehman assets, so you're left with issues of sentiment and issues around financial structure risk."
While financial structure risk was "clearly not zero" Elliffe doubted it was large enough to influence AMP's investment strategy.
"We're continuing to take advantage of the market volatility to buy good New Zealand companies at good prices. We're buying stuff today."
At the retail end of the market Stephen Wright of ASB Securities said there had been little activity among his clients. "They're cautious on the buy side but they haven't been significant sellers. Most of the deals are dominated by institutional investors."
The market turmoil also affected the New Zealand dollar which has been subject to a tug of war between increasing risk aversion and the weakening greenback.
Having closed at US66.87c on Monday, it was sold off aggressively yesterday and closed at US65.05c. While numerous commentators have labelled the current trouble the worst financial crisis in decades, it has yet to spread into, and lay waste to, real economies.
Early on in the crisis commentators maintained the reset of the world was "decoupled" from the US and ongoing growth in emerging Asian economies would offset US weakness.
However that theory was slated yesterday by the Asian development bank which cut its 2007 growth forecast for developing Asian economies from 9 per cent to 7.5 per cent, citing rising inflation, turbulent financial markets and weakening world demand.
"Uncoupling is a myth," ADB chief economist Ifzal Ali said, referring to the idea that Asian economies are increasingly less dependent on the US and Europe to drive their growth.
"If the global slowdown extends beyond 2009, the repercussions for the region could be severe," he said.
Finance Minister Michael Cullen yesterday said New Zealand's economy was vulnerable to an expected global slowdown.
"More importantly for the economy as a whole ... this further round of the financial fallout will tend to lower further GDP forecasts for the world over the next year or two, and that will clearly have some impact on our own growth moving forward."
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