Belfast Telegraph

Global meltdown as markets crash

By Peter Cripps

World markets suffered another hammering yesterday as fresh eurozone and US debt fears wiped another £46bn from the value of London's blue chip index.

The benchmark UK index, the FTSE 100, plunged 3% to its lowest point for nearly a year as investors panicked that America could slide back into recession and Italy and Spain may need bailouts.

More than £75bn has now been wiped off London's top flight index in the past two days as confidence in the global recovery collapses.

There has been a similar bloodbath on markets across the globe as the Dow Jones Industrial Average in the US, the CAC 40 in France and the DAX in Germany all plunged more than 2%.

The cost of borrowing for the Spanish government also rose sharply in a debt auction - signalling lenders have a lack of confidence in the country's ability to handle its debts and avoid a bailout.

Fears intensified after European Commission President Jose Manuel Barroso warned the sovereign debt crisis is spreading and issued a rallying call to European leaders to give their "full backing" to the eurozone.

And more weak economic data from the US fuelled worries about the world's biggest economy after a slight rise in the number of people who applied for unemployment benefits. This came on the back of a raft of disappointing data, including poor manufacturing orders and weak consumer spending.

Investors ploughed their money into safe havens such as gold, which rose to a fresh high of 1,680 US dollars an ounce.

The concerns also hit the price of Brent crude oil, which fell 2% to 110.7 US dollars.

The weak sentiment impacted the heavily-weighted mining sector, which fluctuates depending on the outlook for demand.

Elsewhere, Lloyds Banking Group suffered a further fall after it reported a bottom-line loss of £3.3bn and said higher funding costs squeezed margins during the first half.

World markets have been on a downward trajectory in recent weeks as the US debt crisis adds to ongoing concerns in Europe.

The vast spending cuts outlined in America's debt-limit deal raised fears over the world's biggest economy falling back into recession.

Meanwhile, some traders and analysts are expecting the US to be stripped of its AAA credit rating, in light of recent weak economic data and its debt-laden public purse.

The UK and the pound have also emerged as a so-called safe haven - territory normally reserved for the US dollar.

The yield on 10-year gilts, the benchmark UK Government bond, remains near record lows while sterling strengthened against most major currencies.

Meanwhile, the economic worries were said to be behind the Bank of England's decision to keep interest rates on hold at 0.5%. The Bank warned at its meeting last month that the risks posed by a deteriorating European debt crisis were substantial for the UK.

The head of the UK's tax and spending watchdog conceded that experts expected its growth forecasts for this year to be missed. Robert Chote, who chairs the independent Office for Budget Responsibility, said there "aren't many people" expecting annual growth to reach the 1.7% it anticipated in March.

The deterioration has fuelled speculation that the Bank will engage in a second bout of money-printing to stimulate the economy.

The Bank's nine-strong monetary policy committee has recently discussed the possibility that it will increase the stock of quantitative easing beyond £200bn, in a move that would see it pump more cash into businesses in the hope it will trickle down through the rest of the economy.

The committee will have the benefit of the Bank's latest quarterly inflation and growth forecasts due to be published next Wednesday.

They are expected to show that inflation, which was running at 4.2% in June, will push above 5% this year before heading back towards 2% in 2012.

Growth forecasts for 2011 are also likely to be downgraded from the 1.7% prediction in the last report in May.

The National Institute of Economic and Social Research and the CBI have both downgraded the UK's growth forecasts for 2011 to 1.3% in recent days.

David Kern, chief economist at the British Chambers of Commerce, believes the MPC should keep interest rates on hold until at least the early months of 2012.