Debt crisis fears roil world markets

A wave of funds rushing to safe-haven markets sent share and bond markets roaring in the US.

By Brian Hale in New York

Escalating fears of a global financial crisis sparked turmoil across world markets yesterday.

Worries that Japan is at risk of collapse compounded fears about Latin America and emerging markets because of the Argentine debt crisis.

The rapidly growing concerns roiled equity, bond and currency markets as a wave of funds rushing to safe-haven markets sent share and bond markets roaring in the US with huge gains for the most-watched indicators.

The Dow Jones index soared 237 points (2.3 per cent) while Nasdaq's Composite index rocketed 103 points (5.3 per cent) as "flight-to-quality" buyers accentuated buying by investors who had sold the market short ahead of the corporate earnings season.

US dollar-denominated and US Government-backed debt prices surged too as investors fled from actual or feared global financial trouble even though bond prices usually would have fallen with such a furious rally under way in equities.

The price rises cut the yield on two-year Treasury notes to 3.99 per cent while the five-year note yield dipped to 4.73 per cent, the 10-year note yield dropped to 5.23 per cent and the 30-year bond yield fell to 5.63 per cent.

The Australian dollar was stable on northern hemisphere markets, spending much of the day around US50.40c after an early fall to just above US50c in London. Traders were wary of more intervention by the Reserve Bank and cautious about the currency's proximity to the psychologically important US50c level.

Concerns about Argentina intensified earlier in the week when the Government, forced to sell bonds at yield levels not seen since 1996, ignited further concern that the nation would devalue or, more likely, default on $US128 billion ($254 billion) in outstanding debt.

Argentina's MerVal sharemarket index tumbled 13.2 per cent yesterday. The benchmark Argentine 2008 US dollar-denominated bond fell as much as 23 per cent at one point in the wake of ratings agency Fitch's downgrade of Argentina's sovereign ratings. Fitch warned that public debt dynamics imperilled the Argentine Government's capacity to meet its debt obligations.

Brazil's real yesterday fell to its lowest level against the US dollar since its introduction in 1994 and extended its dip since January to 30 per cent in the wake of worries from Argentina. On the Brazilian sharemarket, the benchmark Bovespa index fell another 1 per cent yesterday.

Mexico also began to be affected yesterday after its peso fell 1.5 per cent even though previous economic reforms had seemed to guarantee immunity.

Elsewhere, the focus was on Turkey's crushing debt problem, further pounding its currency, and Poland's zloty fell to a seven-month low.

Concern also grew about Asia. Confirmation that Singapore fell into recession in the second-quarter increased worries about its neighbours. The US slowdown and technology collapse threatens to drag down East Asian economies that have been exporting their way to health.

Some experts expect far less contagion than during the previous global financial crisis in 1998, when the US Federal Reserve feared a systemic collapse in the US financial system.

"The contagion into other markets should be more muted than in 1998 because there is much less leverage in the system," said Mr Peter Petas, an analyst with CreditSights.

"What we'll likely see is more risk aversion from fund managers and also some selling to turn paper profits into realised gains."

Other experts were not so sanguine. The Bank Credit Analyst research group warned that "the rotational currency weakness in the emerging Asian region is spreading after the Singapore dollar's fall to an 11-year low against the US dollar" and suggested that "this shift in competitiveness will act like a domino and pressure the Malaysian authorities to devalue the ringgit peg".

"While all eyes are on Argentina and the contagion from its debt crisis, Japan represents the biggest cyclical threat to the world economy. Nominal GDP has been contracting since 1997, even before the downturn in real GDP growth hit," BCA said.

"The risk is that the slow decay in Japan will escalate, triggering an economic implosion and deflationary shock waves round the globe".

As the flight to the US dollar and US securities gathered pace, the International Monetary Fund's latest analysis of global capital flows highlighted the risks posed by reliance on a single major economy.

Jan Eakin reports:

Meanwhile, the domestic sharemarket posted a flat performance with gains by News Corp and NAB offsetting a further slide by Telstra.

News gained 19c to $17.79 and the preferreds 20c to $15.35 aided by Wall Street's surge overnight. NAB bounced 29c to $32.55, while Telstra dropped 14c to $5.26 after revealing it had abandoned the sale of its network design arm.

The All Ordinaries index rose 4.3 points to 3342.1.

http://www.smh.com.au/

-- Martin Thompson (mthom1927@aol.com), July 13, 2001

Answers

California facess a severe financial crisis, caused by the regional electricity crisis this last winter. This was in turn caused, in large part, by the "Y2K+1" version of the Computer Century Leap Year Date Bug, due to embedded systems skipping day 366 of year 00.

Unless resolved, California is so large it could precipitate economic crisis in the United States as a whole. And if the entire world economic system is depending on the strength of the U.S. economy to avoid severe crisis, California's economic crisis are highly likely to cascade very dramatically, worldwide.

Thus, the Y2K crisis isn't over yet. A "medium case" scenario is still entirely possible, although not in the manner foreseen in 1999.

-- Robert Riggs (rxr.999@worldnet.att.net), July 14, 2001.

In answer to Robert Riggs I would say that CA has there energy crisis under control. In April and May they were predicting 200-300 hours of rolling blackouts and there has been none. CA has there energy crisis under control due to conservation. It was that simple and that quick. Of course a lot of the conservation was due to the pressure of much higher electric costs. The summer is half over and if they haven't had any yet, its unlikely they will unless some key power plants go down.

However, CA, its taxpayers and ratepayers have billions in energy costs hanging over there head. Maybe the IMF will come in and float them a loan (ha, ha). In any case, CA has successfully postponed there crisis. The crisis takes another form of small and big companies being unable to afford the higher rates.

-- Guy Daley (guydaley1@netzero.net), July 14, 2001.

there noun: a location other than here

their pronoun: of them or themselves

-- lexicon (words@websters.com), July 14, 2001.