MANILA, SEPTEMBER 24, 2011 (STAR) World markets buckled under a frenzied sell-off Thursday as investors panicked, believing the global economy was headed for another slump that policymakers may be ill-equipped to prevent.

From New York to Tokyo, it was a brutal day for investors as countless billions of dollars were wiped off the value of companies globally.

In Manila, the benchmark 30-company Philippine Stock Exchange index (PSEi) settled at its lowest level in three years as investors turned to safer US dollar and government bonds. The peso, meanwhile, briefly touched the P44 to $1 level before recovering at P43.58 from Thursday’s P43.77.

The PSEi plummeted 210.14 points or 5.13 percent to close at 3,885.96, logging its biggest drop since Oct. 27, 2008.

The 30 firms that make up the Dow Jones Industrial Average alone lost $103 billion of their value or around 3.5 percent while major indexes in Europe, Asia and Latin America commonly suffered losses of around five percent.

The seeds for the turmoil appear to have been planted Wednesday, when the Federal Reserve warned an already tepid US recovery faces serious risks, even as the bank appears to be running low on policy remedies.

“It’s the ever-increasing threat of another recession that is really spooking investors,” said analyst Simon Denham at Capital Spreads.

But concern about the fate of the world’s largest economy only heightened long-running fears that key pillars of the global economy are cracking under the strain of debt and slow growth.

The Dow lost 391 points to finish the day at 10,734, a level only seen once in the last year.

London’s FTSE-100 index closed down 4.7 percent, Brazil’s Bovespa was down 4.8 percent and Hong Kong’s Hang Seng closed down 4.9 percent to its lowest finish since July 2009.

As representatives from the world’s major economies gathered in Washington for a regular meeting of the G20 and the International Monetary Fund (IMF), there were increasing doubts that Europe can overcome political difference and decisively tackle its long-running debt crisis.

“Bad economic news from the United States and Europe, compounded by political paralysis and the risk of a serious policy mistake, continues to roil markets,” IHS chief economist Nariman Behravesh and IHS Global Insight economist Sara Johnson told clients.

The heads of the World Bank and IMF warned that Europe and the US risked “suffocating” the global economy if they did not get control of their economies.

Danger zone

World Bank president Robert Zoellick called for action, warning: “The world is in a danger zone.”

The IMF’s Christine Lagarde said that risks to the global economy had increased, “but there is a way forward, if countries act now, act boldly, and act together.”

But across the globe investors voted with their feet, pumping money into perceived safe-haven assets, notably the dollar and US government debt.

The euro fell to its lowest level since January against the dollar, at $1.3462 at 2130 GMT, while the yield on the 10-year Treasury note sank to a new record low, indicating sky-high demand.

Michael Hewson of CMC Markets said “European markets have plunged today on a trifecta of different factors, starting with disappointment about last night’s measures by the Federal Reserve as well as its downbeat assessment of the US economy.”

He added that “fears about a slowdown in China on disappointing HSBC manufacturing PMI, which contracted for the third month in a row, and disappointing eurozone, French and German manufacturing PMI’s data,” also weighed on sentiment.

It was stocks that bore the brunt of that flight to safety.

Tokyo shed 2.1 percent and Shanghai lost 2.8 percent.


In the Philippines, anxieties over the US sliding back into recession and Italy and Spain heading for bailouts left shares tumbling.

The main composite index is now 10 percent below its end-2010 level with global markets issuing a vote of no confidence in the management of the world’s two largest economies the US and the Euro zone. Year-to-date loss has reached 7.5 percent.

All sub-indices were in the red, led by mining and oil which slid by 9.87 percent followed by property which lost 6.08 percent.

The broad All-Share index likewise plunged by 4.6 percent. Of the stocks traded, 166 turned up losers as against 13 gainers, with 15 unchanged. A total of 13.87 billion shares changed hands valued at P8.19 billion.

“Growing concerns on the global economic slowdown is scaring the market. Most investors are worried that the recession fears will turn out to be a nightmare for the market. Most opted to sell down the market and shift to safer investment instruments,” said Astro del Castillo, managing director at First Grade Holdings Inc.

“The US is wrestling with its debt concerns and poor growth while Europe’s sovereign debt crisis threatens to bankrupt Greece and place Italy in a similar position. For the moment, market performance hinges largely on global issues but discerning investors should watch oversold stocks, careful for signs of recovery,” AB Capital Securities said in its online market report.

Foreign investors remained on the sell side and posted a net selling amount of P267.6 million. Among yesterday’s top losers were Semirara Mining, Philex Mining and Atlas Mining, Lepanto.

The most actively traded stocks were PLDT and Metrobank.

Meanwhile, volume at the Philippine Dealing & Exchange Corp. (PDEX) was heavy at $964.84 million from $1.356 billion last Thursday.

Traders pointed out that central banks in the region including the Bangko Sentral ng Pilipinas (BSP) have been intervening in the foreign exchange markets to stem the decline in local currencies against the US dollar.

The US Federal Reserve on Wednesday warned of significant risks to the already weak US economy and launched a new plan to lower long-term borrowing costs and bolster the battered housing market.

The US Fed announced it would sell $400 billion of short-term Treasury bonds to buy the same amount of longer-term US government debt as part of efforts to boost growth that slowed to a crawl over the first half of the year.

Protectionism looms

In Washington, the WB’s Zoellick said protectionism and populist policies in the developing world could rise as countries face increasing head winds from a growing European sovereign debt crisis and a weakening economic recovery in the US.

Zoellick warned another crisis was building at a time when the budgets of many developing economies had not fully recovered from the 2008 financial storm, adding to their fiscal strains.

He told Reuters in an interview more than half of developing countries’ budgets have deteriorated by two percent of gross domestic product since 2007, and more than 40 percent of developing nations now have government deficits in excess of 4 percent of GDP.

“If the situation deteriorates further, then developing countries’ growth could turn down, their asset prices could drop and then their non-performing loans could increase,” Zoellick said.

“With these pressures and prospects we have to anticipate possible protectionist pressures, beggar-thy-neighbor policies and a risk of a retreat to populism,” he added.

While he still believed advanced economies could avoid a double-dip recession, Zoellick said his concerns were growing unless they acted forcefully to tackle their problems.

“A crisis made in the developed world could become a crisis for developing countries,” he said. “Europe, Japan and the United States must act to address their big economic problems before they become bigger problems for the rest of the world. Not to do so would be irresponsible.”

Developing economies, he said, had grown more resilient over the past decade and were in a better position to withstand another crisis but they were still concerned about the spillover effects from troubled advanced economies.

Some of the largest impacts to poorer countries would be felt through a decline in global demand, which would affect trade and commodity prices.

Zoellick said $6.1 trillion was wiped out globally in stock market declines over the past couple of months, which is equivalent to 10 percent of global GDP.

A meeting of finance leaders from emerging market economies China, India, Russia, South Africa and Brazil in Washington on Thursday called for ‘decisive action’ by advanced countries to tackle the deterioration in their economies.

“The best role for the BRICS countries is the same as the best role for any country, which is to focus on what they need to do at home to get through the current financial dangers and to move on to long-term growth,” he said.

Zoellick said he was paying close attention to consumer and business confidence in emerging economies. Zinnia de la Peña, Lawrence Agcaoili


25 Signs That The Financial World Is About To Hit The Big Red Panic Button

Most of the worst financial panics in history have happened in the fall. Just recall what happened in 1929, 1987 and 2008.

Well, September 2011 is about to begin and there are all kinds of signs that the financial world is about to hit the big red panic button. Wave after wave of bad economic news has come out of the United States recently, and Europe is embroiled in an absolutely unprecedented debt crisis.

At this point there is a very real possibility that the euro may not even survive. So what is causing all of this? Well, over the last couple of decades a gigantic debt bubble has fueled a tremendous amount of "fake prosperity" in the western world.

But for a debt bubble to keep going, the total amount of debt has to keep expanding at an ever increasing pace. Unfortunately for the global economy, sources of credit are starting to dry up.

That is why you hear terms like "credit crisis" and "credit crunch" thrown around so much these days. Without enough credit to feed the monster, the debt bubble is going to burst. At this point, virtually the entire global economy runs on credit, so when this debt bubble bursts things could get really, really messy.

Nations and financial institutions would never get into debt trouble if they could always borrow as much money as they wanted at extremely low interest rates. But what has happened is that lending sources are balking at continuing to lend cheap money to nations and financial institutions that are already up to their eyeballs in debt.

For example, the yield on 2 year Greek bonds is now over 40 percent. Investors don't trust the Greek government and they are demanding a huge return in order to lend them more money.

Throughout the financial world right now there is a lot of fear. Lending conditions have gotten very tight. Financial institutions are not eager to lend money to each other or to anyone else. This "credit crunch" is going to slow down the economy. Just remember what happened back in 2008. When easy credit stops flowing, the dominoes can start falling very quickly.

Sadly, this is a cycle that can feed into itself. When credit is tight, the economy slows down and more businesses fail. That causes financial institutions to want to tighten up things even more in order to avoid the "bad credit risks".

Less economic activity means less tax revenue for governments. Less tax revenue means larger budget deficits and increased borrowing by governments. But when government debt gets really high that can cause huge economic problems like we are witnessing in Greece right now. The cycle of tighter credit and a slowing economy can go on and on and on.

I spend a lot of time talking about problems with the U.S. economy, but the truth is that the rest of the world is dealing with massive problems as well right now. As bad as things are in the U.S., the reality is that Europe looks like it may be "ground zero" for the next great financial crisis.

At this point the EU essentially has three choices. It can choose much deeper economic integration (which would mean a huge loss of sovereignty), it can choose to keep the status quo going for as long as possible by providing the PIIGS with gigantic bailouts, or it can choose to end of the euro and return to individual national currencies.

Any of those choices would be very messy. At this point there is not much political will for much deeper economic integration, so the last two alternatives appear increasingly likely.

In any event, global financial markets are paralyzed by fear right now. Nobody knows what is going to happen next, but many now fear that whatever does come next will not be good.

The following are 25 signs that the financial world is about to hit the big red panic button....

#1 According to a new study just released by Merrill Lynch, the U.S. economy has an 80% chance of going into another recession.

#2 Will Bank of America be the next Lehman Brothers? Shares of Bank of America have fallen more than 40% over the past couple of months. Even though Warren Buffet recently stepped in with 5 billion dollars, the reality is that the problems for Bank of America are far from over. In fact, one analyst is projecting that Bank of America is going to need to raise 40 or 50 billion dollars in new capital.

#3 European bank stocks have gotten absolutely hammered in recent weeks.

#4 So far, major international banks have announced layoffs of more than 60,000 workers, and more layoff announcements are expected this fall. A recent article in the New York Times detailed some of the carnage....

A new wave of layoffs is emblematic of this shift as nearly every major bank undertakes a cost-cutting initiative, some with names like Project Compass. UBS has announced 3,500 layoffs, 5 percent of its staff, and Citigroup is quietly cutting dozens of traders.

Bank of America could cut as many as 10,000 jobs, or 3.5 percent of its work force. ABN Amro, Barclays, Bank of New York Mellon, Credit Suisse, Goldman Sachs, HSBC, Lloyds, State Street and Wells Fargo have in recent months all announced plans to cut jobs — tens of thousands all told.

#5 Credit markets are really drying up. Do you remember what happened in 2008 when that happened? Many are now warning that we are getting very close to a repeat of that.

#6 The Conference Board has announced that the U.S. Consumer Confidence Index fell from 59.2 in July to 44.5 in August. That is the lowest reading that we have seen since the last recession ended.

#7 The University of Michigan Consumer Sentiment Index has fallen by almost 20 points over the last three months. This index is now the lowest it has been in 30 years.

#8 The Philadelphia Fed's latest survey of regional manufacturing activity was absolutely nightmarish....

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009

#9 According to Bloomberg, since World War II almost every time that the year over year change in real GDP has fallen below 2% the U.S. economy has fallen into a recession....

Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy.

#10 Economic sentiment is falling in Europe as well. The following is from a recent Reuters article....

A monthly European Commission survey showed economic sentiment in the 17 countries using the euro, a good indication of future economic activity, fell to 98.3 in August from a revised 103 in July with optimism declining in all sectors.

#11 The yield on 2 year Greek bonds is now an astronomical 42.47%.

#12 As I wrote about recently, the European Central Bank has stepped into the marketplace and is buying up huge amounts of sovereign debt from troubled nations such as Greece, Portugal, Spain and Italy. As a result, the ECB is also massively overleveraged at this point.

#13 Most of the major banks in Europe are also leveraged to the hilt and have tremendous exposure to European sovereign debt.

#14 Political wrangling in Europe is threatening to unravel the Greek bailout package. In a recent article, Satyajit Das described what has been going on behind the scenes in the EU.... The sticking point is a demand for collateral for the second bailout package.

Finland demanded and got Euro 500 million in cash as security against their Euro 1,400 million share of the second bailout package. Hearing of the ill-advised side deal between Greece and Finland, Austria, the Netherlands and Slovakia also are now demanding collateral, arguing that their banks were less exposed to Greece than their counterparts in Germany and France entitling them to special treatment.

At least, one German parliamentarian has also asked the logical question, why Germany is not receiving similar collateral.

#15 German Chancellor Angela Merkel is trying to hold the Greek bailout deal together, but a wave of anti-bailout "hysteria" is sweeping Germany, and now according to Ambrose Evans-Pritchard it looks like Merkel may not have enough votes to approve the latest bailout package....

German media reported that the latest tally of votes in the Bundestag shows that 23 members from Mrs Merkel's own coalition plan to vote against the package, including twelve of the 44 members of Bavaria's Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse.

#16 Polish finance minister Jacek Rostowski is warning that the status quo in Europe will lead to "collapse". According to Rostowski, if the EU does not choose the path of much deeper economic integration the eurozone simply is not going to survive much longer....

"The choice is: much deeper macroeconomic integration in the eurozone or its collapse. There is no third way."

#17 German voters are against the introduction of "Eurobonds" by about a 5 to 1 margin, so deeper economic integration in Europe does not look real promising at this point.

#18 If something goes wrong with the Greek bailout, Greece is financially doomed. Just consider the following excerpt from a recent article by Puru Saxena.... In Greece, government debt now represents almost 160% of GDP and the average yield on Greek debt is around 15%.

Thus, if Greece’s debt is rolled over without restructuring, its interest costs alone will amount to approximately 24% of GDP. In other words, if debt pardoning does not occur, nearly a quarter of Greece’s economic output will be gobbled up by interest repayments!

#19 The global banking system has a total of 2 trillion dollars of exposure to Greek, Irish, Portuguese, Spanish and Italian debt. Considering how much the global banking system is leveraged, this amount of exposure could end up wiping out a lot of major financial institutions.

#20 The head of the IMF, Christine Largarde, recently warned that European banks are in need of "urgent recapitalization".

#21 Once the European crisis unravels, things could move very rapidly downhill. In a recent article, John Mauldin put it this way.... It is only a matter of time until Europe has a true crisis, which will happen faster – BANG! – than any of us can now imagine.

Think Lehman on steroids. The U.S. gave Europe our subprime woes. Europe gets to repay the favor with an even more severe banking crisis that, given that the U.S. is at best at stall speed, will tip us into a long and serious recession. Stay tuned.

#22 The U.S. housing market is still a complete and total mess. According to a recently released report, U.S. home prices fell 5.9% in the second quarter compared to a year earlier. That was the biggest decline that we have seen since 2009. But even with lower prices very few people are buying. According to the National Association of Realtors, sales of previously owned homes dropped 3.5 percent during July. That was the third decline in the last four months. Sales of previously owned homes are even lagging behind last year's pathetic pace.

#23 According to John Lohman, the decline in U.S. economic data over the past three months has been absolutely unprecedented.

#24 Morgan Stanley now says that the U.S. and Europe are "hovering dangerously close to a recession" and that there is a good chance we could enter one at some point in the next 6 to 12 months.

#25 Minneapolis Fed President Narayana Kocherlakota says that he is so alarmed about the state of the economy that he may drop his opposition to more monetary easing. Could more quantitative easing by the Federal Reserve soon be on the way?

Things have not looked this bad for global financial markets since 2008. Unless someone rides in on a white horse with trillions of dollars (or euros) of easy credit, it looks like we are headed for a massive credit crunch.

What we witnessed back in 2008 was absolutely horrifying. Very few people want to see a repeat of that. But as things in the U.S. and Europe continue to unravel, it appears increasingly likely that the next wave of the financial crisis could hit us sooner rather than later.

None of the fundamental problems that caused the crisis of 2008 have been fixed. The world financial system is still one gigantic mountain of debt, leverage and risk.

Authorities around the globe will certainly do all they can to keep things stable, but in the end it is inevitable that the house of cards is going to come crashing down.

Let us hope for the best, but let us also prepare for the worst.

Chief News Editor: Sol Jose Vanzi

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