IMF warns that markets could collapse by another 20%
David Smith and Dominic Rushe – Times Online October 12, 2008
The world is on the brink of financial meltdown, the head of the International Monetary Fund (IMF) said last night. His bleak warning came as finance ministers tried to calm the frenzy in markets that saw share prices crash by more than 20% last week.
Separately, the IMF’s chief economist predicted that shares could slump by another 20% before stabilising. G7 finance ministers pledged to take all necessary steps to support the banking system and stave off an economic slump.
Dominique Strauss-Kahn, the head of the IMF, warned that the measures so far “have not yet achieved the goal of stabilising markets and bolstering confidence”.
He said: “Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” Countries would need to take further measures, including interest rate cuts and steps to bolster the banks.
Olivier Blanchard, his chief economist, said stock markets had further to fall. “At the worst, the governments will need another few weeks to make the right assessment and the stock exchanges could fall by another 20%; then there will be a turnaround,” he said.
The warnings came as G7 finance ministers, including Alistair Darling, met George Bush at the White House. “We are in this together,” the president said. “We will come through it together.” Other experts warned that the instability was likely to continue.
Mario Draghi, governor of the Bank of Italy and chairman of the Financial Stability Forum, which advises the leading economies, said he was “amazed” by what was happening and that it was “very difficult” to see the end of the crisis.
“I don’t have my crystal ball here,” he said. The panic in the stock markets was partly due to the “root psychology of major investors all over the world. You are not going to change that in a day”.
Simon Johnson, until this year the IMF’s chief economist, said he was disappointed the G7 had not produced a fully worked-out plan to fight a slump. “The financial system just got nuked and they don’t understand the full extent of it,” he said.
George Magnus, senior economic adviser at UBS, said stabilising the system was still possible but that countries had to act fast: “The most charitable response is that they have set out a framework and we will see countries filling in the details over the next three to four days. If that happens we could still be okay.”
Gordon Brown will travel to Paris today to urge European leaders to copy the British bailout programme and agree a Europe-wide plan to “recapitalise” struggling banks by taking equity stakes in them. America said this weekend it plans to do that.
In an unusual move, President Nicolas Sarkozy has invited Brown to join a meeting of eurozone heads of government to explain the merits of the UK model. A source close to the French presidency said eurozone leaders would take Britain’s initiative as a reference. “There are two competing models,” he said. “The American model, which no one wishes to draw inspiration from, and the British model. This is what everyone is talking about.”
The prime minister will first meet Sarkozy, Jose Manuel Barroso, president of the European commission, and Jean-Claude Trichet, president of the European Central Bank. Brown will then make his pitch to the leaders of the 15 countries in the euro currency area.
A spokesman for No 10 said: “This is clearly an important moment. It is very important that Europe acts together and works together. What we have set out is a comprehensive plan which tackles the three issues of liquidity, funding and capital. Any action must now be taken internationally.”
Today’s meeting is the last opportunity for European leaders to show they are taking the necessary steps to support the banks before the markets open tomorrow. Germany has indicated that it is prepared to adopt elements of the British plan by putting capital into its banks. One sticking point may be the lack of a comprehensive guarantee for the banks.
Tomorrow the first of the British banks to be bailed out by the government’s £400 billion rescue plan will reveal how much money they want. Royal Bank of Scotland (RBS), which has seen its market value fall to under £12 billion, is to ask the government to underwrite a £15 billion cash call. HBOS, Britain’s biggest provider of mortgages, is demanding up to £10 billion, while Lloyds TSB and Barclays require £7 billion and £3 billion respectively.
Although existing investors will have the right to put up the new capital, and some may do so, the rescue could leave the government owning 70% of HBOS and 50% of RBS. Crisis talks were taking place this weekend between the Treasury, the Financial Services Authority, the Bank of England and the heads of the four retail banks to decide final details.
A YouGov poll for The Sunday Times suggests the crisis has boosted Brown’s popularity. Support for Labour has risen by seven points in the past month to 33%, its highest since January. The Tories are on 43%, down three points.
The prime minister’s rating is at its highest since March, while he and Darling are regarded by voters as more trusted to deal with the crisis than David Cameron and George Osborne.
Allies of Brown have suggested this could be his “Falklands moment”, a reference to Margaret Thatcher’s rise from huge unpopularity in the early 1980s as a result of the successful war with Argentina.
Additional reporting: Nicola Smith
Last updated 15/10/2008