World leaders urge calm as stocks continue to plummet
Pastor Dale Morgan
World leaders urge calm as stocks continue to plummet*
PARIS (AFP) - - World leaders on Thursday insisted that the US subprime
crisis would not cause an economic downturn but stock markets across the
world plummeted again as investors appeared unconvinced.
US Treasury Secretary Henry Paulson admitted that American growth would
be hit but said the world could weather the storm because it came
"against a backdrop of a very healthy global economy with strong
fundamentals."
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, with London taking its biggest one-day fall
since the run-up to the Iraq war in 2003 and Wall Street and Asian
stocks sharply lower.
"There's a growing fear that the turmoil in the credit markets, along
with rising investor fear, could start to undermine the global growth
and strong company profits story, and the markets could be at the start
of a negative spiral," said John Noonan, an analyst at Thomson IFR Markets.
Crude oil prices fell heavily as traders fretted that the market
turbulence could crimp economic growth and demand for energy. And major
currencies were also roiled, with the yen soaring against the euro and
the dollar as players unwound risky bets.
Investors are worried about a global credit crunch as more banks and
investment funds around the world reveal their exposure to the slumping
US subprime, or high-risk, home loan sector, analysts said.
The fear is that banks will suspend normal lending practices as they
move to cover their losses, thereby restricting access to credit for
investors and companies.
Central banks across the world have since last week pumped tens of
billions of dollars into the banking system, offering loans at lower
rates to commercial banks to forestall a credit crunch that could damage
economic growth.
The US Federal Reserve flexed its financial muscle again Thursday,
injecting 17 billion more dollars into the US banking system, while the
Bank of Japan said it would release an extra further 400 billion yen
(3.4 billion dollars) to calm frayed nerves.
The crisis stems from the US housing market, which after years of
booming house prices and cheap credit is now in reverse, with loans
becoming more expensive and house prices falling.
This has caused high numbers of mortgage defaults as borrowers,
particularly subprime borrowers -- people who have a poor credit history
-- struggle to make their repayments.
Dozens of US mortgage lenders have been put out of business and major US
and European banks have taken a hit.
Countrywide Financial, America's leading mortgage lender, said Friday it
had tapped an 11.5-billion-dollar credit line to boost its finances.
Shares in Countrywide plunged 14.98 percent in New York as investors
panicked over the latest sign that the crisis was widening.
Ratings agency Moody's Investors Service downgraded Countrywide's credit
to its lowest investment-grade rating and warned all of the company's
ratings remained under review for further downgrades.
President Sarkozy called for the Group of Seven (G7) most industrialised
nations to take steps to improve oversight of world markets, but
insisted that "these market movements will not lastingly affect the
growth of our economies, which is strong."
US Treasury Secretary Paulson said that fears over the US mortgage
market "will extract a penalty on the growth rate" of the US economy.
But "the economy and the markets are strong enough to absorb the losses"
without provoking a US recession, he told the Wall Street Journal.
In Australia, Prime Minister Howard said Australia had a much smaller
percentage of the sort of risky subprime mortgage loans than in the
United States and urged people not to overreact.
The European Commission meanwhile said it will investigate how credit
ratings agencies operate, amid mounting criticism that they did not act
fast enough to warn investors about the danger of putting money into
securities linked to subprime home loans in the US.