And you thought last Monday was bad.
The FTSE 100 has today fallen by more than 300 points, and stock markets around the world are seeing similar collapses.
There’s a lot going on, but what it essentially boils down to is this – investors have finally realised that this is the real thing. We really are facing a massive global slowdown, and even if our governments could do anything about it (which is debatable), they are in fact all running around like headless chickens panicking.
As US money manager Frederic Dickson tells Bloomberg, with a sense of understatement rarely seen at the moment: “It will probably be a rough week for global investors as they realise the credit crisis has a long way to play out.”
And it could be toughest of all in Europe, which has come to the sudden and painful realisation that while the ‘Anglo-Saxon capitalism’ model might not appeal to their politicians, their bankers lapped it up (see: How Europe could be the credit crunch’s next victim for more on this) – and now they’re paying for it. “The euro zone is the second domino of the globe to be falling over after the US,” said one currency dealer to Bloomberg.
In Europe – which, bear in mind, is meant to be trying to co-operate to sort this crisis out, particularly as they all share a central bank – Germany has guaranteed all existing and yet-to-be-opened private German bank accounts. That’s currently worth €568bn, reports the FT – “to tell people that their savings are safe,” as German chancellor, Angela Merkel, put it yesterday.
Yet the move came just a day after she’d condemned Ireland for doing the same thing. Now Ireland, Greece, Germany – and Denmark too, though you may not have noticed in all the fuss – have 100% guarantees on savers’ deposits. That puts a lot of pressure on other European governments. This isn’t co-operation – this is a race for the lifeboats.
It seems that fears that the surprise €50bn bail-out of mortgage and public sector lender, Hypo Real Estate, would spook savers, were behind the move. Hypo was supposed to have been saved, but it turns out its funding gap was bigger than expected. Dresdner Kleinwort suggests that the fact “that Germany felt compelled to follow Ireland and Greece… suggests pressure on telephone and internet withdrawals was intolerable. Unlike a classic bank run, the electronic age means you can’t see deposits going ‘out of the door’ as an outside observer… bank runs can happen without a queue forming at branches.”
It’s far from the only European bank admitting the strain. BNP Paribas has bought Fortis’s units in Belgium and Luxembourg for €14.5bn after a government rescue failed. Italy’s biggest bank Unicredito has seen trading in its shares in Milan stopped after it decided to raise capital by replacing this year’s dividend with €3.6bn of new shares, and selling €3.6bn of convertible securities.
The euro has fallen sharply, while the cost of borrowing is soaring. The euro interbank offered rate (Euribor), which is what banks charge each other for three-month euro-denominated loans, rose to 5.35% today, the seventh all-time high in a row.
But more worrying still is what might come next, starting in the US. With money markets frozen over, companies – even non-financial ones – are having real problems borrowing money. We’re not talking about borrowing money for big projects here – we’re talking about short-term lending for working capital. And Arnold Schwarzenegger has warned that the state of California might have to borrow directly from the Fed by the end of this month, or it’ll literally run out of money.
As Bloomberg puts it: “A cash crunch on Main Street would endanger companies’ basic functions – paying suppliers, making payrolls, and rolling over debt.” Companies are being forced to draw down on emergency funding lines for these functions, but that can’t last forever.
We’re rapidly reaching the point where the credit crisis is going to make itself felt very obviously in the ‘real’ economy. If employees get to work one day and realise there’s no money in the bank to pay their salaries, that would make the panic over banking solvency look like a storm in a teacup.
Because of that, as Dresdner puts it, “state intervention is very probable”, but this “will lead to unpredictable outcomes, and especially, uncertain recovery for creditors.” And if creditors are worried about getting their money back, what do they do? That’s right – they keep a tight rein on lending.
With banks continuing to prefer to keep their money where they can get to it, companies will find it very hard to get access to credit at almost any price. As Dresdner says, “we therefore continue to think that defaults will rise much more quickly than the market expects.”
Panicky governments, rising company collapses, and ever-tightening credit conditions – this may not be the last ‘meltdown Monday’ we see this year.