Fear Stalks Global Markets Central Banks In Massive Bail-out

The Age

Friday September 19, 2008

By Vanessa O'Shaughnessy, Investment reporter

THE Australian sharemarket was pummelled again, closing at a 33-month low, and has now lost a third of its value in less than a year.

The S&P/ASX 200 Index plunged 4.1%, following a disastrous session in the US that exposed doubts about the US Federal Reserve's $US85billion bail-out of insurance giant AIG.

The market rallied late in the day, but still closed 114.9 points, or 2.4%, lower at 4607.3 points.

It was helped by the joint efforts of six central banks, including the US Federal Reserve, which will inject an additional $US180 billion into financial markets over the next 41/2 months.

As this edition went to press, President George Bush was delivering an address to the nation on the measures the Government was taking to stabilise the economy. (Go to the age.com.au for details.)

News of the capital infusion - which unclogged currency markets and encouraged participants to deal with each other - offered Europe a spark of optimism last night, though the key indices had pared their gains by the latter part of the session. And the Australian dollar was lifted above US80.

Even so, more than $US19 trillion has been erased from global sharemarkets since October 31 last year.

The Australian market is down almost 33% from its peak on November 1. And the New Zealand market has fallen 23% in the past year. It slumped 3.4% yesterday.

Initial falls were prompted by losses in the US subprime mortgage market, which spread to financial products marketed across the world.

KPMG head of Financial Services Andries Terblanche said the tentacles of financial distress were spreading.

"We are now dealing with a global world that's so interconnected and so intertwined," he said.

This week, financial woes at Lehman Brothers forced the 158-year-old investment bank to file for bankruptcy.

The mammoth AIG teetered because of losses on credit derivatives, before it was handed a last-minute lifeline. And Merrill Lynch joined Bear Stearns in the forced sale club, with a rushed $US50 billion marriage to Bank of America.

But since then, the rot has spread. Australia's Macquarie Bank is down to just $26.05 a share, the lowest in almost 51/2 years, as investors flee highly leveraged companies and stand-alone investment banks.

Shares in smaller rival Babcock & Brown have been reduced to just 76, with a 17% fall yesterday. And insurer Suncorp-Metway tumbled almost 20% because of speculation over its financial health, closing almost 6% lower at $8.35.

Even Australian banks that have remained relatively capital-rich have dived, with Westpac losing $1.01 to $22 yesterday, while National Australia Bank fell $1.10 to $19.60.

Last night British bank Lloyds TSB and distressed rival Halifax Bank of Scotland (HBOS) agreed to an all-stock #12.2 billion ($A27.46billion) deal, in effect protecting the smaller bank because of a dramatic share-price plunge.

Morgan Stanley, one of the two remaining US stand-alone investment banks, is said to be considering a deal with US bank Wachovia.

Morgan Stanley lost about 24% of its value on Wednesday, and is down more than 68% over the past year.

Similarly Goldman Sachs, which this week reported a $US845 million third-quarter profit, had its share price cut by 14%, or $US18.51, to $US114.5 a share on Wednesday. This was almost 40% lower than a year ago.

In debt markets, the yield on US treasuries has sunk to near its lowest since World War II as investors avoid any kind of risk by buying more government-guaranteed investments.

All this followed the US Government's seizure of mortgage finance companies Freddie Mac and Fannie Mae, and the collapse of at least 11 other US banks.

Investors have also rushed to gold as a haven, pushing the Australian-dollar price to a record $1123.14 an ounce, representing a jump of about $160 in four days.

Gold stocks were among the 31 members of the S&P/ASX 200 that gained.

However, the chief executive of nickel miner Mincor Resources, David Moore, said resource companies were also aware of the pressure in financial markets.

Mining equipment that was almost impossible to source a year ago was now available at any time, he said.

© 2008 The Age

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