Yesterday was a very, very bad day on European stock exchanges, with key indices sliding down massively. To give some examples – UK’s FTSE 100 down 7.8% (the largest fall since 1987’s crisis), France’s CAC 40 down 9%, Germany’s DAX down over 7%, Russia’s RTS down over 19% resulting in Russian stock markets being shut down today again. Asian markets were also sharply down. There are more market casualties – Fortis (a Dutch-Belgian bank) and Hypo Real Estate (a German bank) – and seeking urgent rescue either through cash injections or a quick merger.

Iceland continues to struggle under the weight of its massive banking crisis, trying to avoid national bankruptcy, with the second largest bank Landsbanki now being nationalised – this is in addition to Glitnir about which I wrote recently. Thus, this week the US economic calamities have been demonstrated to well and truly impact global markets – not that we have doubted this earlier.

Cause of the panic: The European stock market slide is attributed to the lack of a coordinated economic front amongst EU’s governments which does nothing to restore confidence in the system at the time when emerging economic data is implying that US is entering a recession. US’s recession will impact the world’s economy due to its global nature. European governments are pursuing their goals in isolation and cannot have seen the depth of the crisis we are about to enter. According to this article, we are staring into the abyss of a systemic collapse, with markets at risk of closure. One recommendation is for the European central bank to lower its interest rate immediately and start acting like the lender of last resort to companies in trouble. Lowering the rate of interest should kick off inflation, one side effect of which will be to reduce the real value of outstanding debt, making debt obligations easier to bear.

UK is also showing deteriorating economic figures, prompting statements that it too is now technically in recession. Meanwhile, European countries are introducing their own measures to address the credit crisis and resulting stock market plunges, but there is no overall agreed policy. This must be reflective of a panic that set in amongst governments, each trying to protect their own skin in the eyes of the very concerned electorate by introducing quick measures. Divided, they stand.

UK Government procrastination: But words and promises, however loudly spoken, do not seem to be having any effect anymore. In UK, the government has made general noises about protecting the interests of the population, which was so generic a statement it probably dented the confidence. We are not seeing enough Labour Government leadership in this matter. Alistair Darling is criticised for not responding to the crisis quickly enough and delaying a concrete announcement about the measures UK is going to take. He is currently in talks with key banks to agree the necessary steps. UK might also move towards guaranteeing all personal savings in line with some other European states. But will this be enough? After all, Europeans made similar promises and their markets aren’t in top shape.

Today’s chaos: The start of the day has been almost as bad as yesterday, panic and chaos continuing to spread. The headline news for the UK is that RBS shares falling sharply over 30% on the 6th October, to a 13-year low. The company’s credit rating by S&P has been reduced last night due to its declining earnings and bad debts in a volatile market. The bank is generally perceived to be doing less well than its competitors in current conditions. The other UK banking sliders of the morning are Barclays, down 15%, Lloyds TSB down 21%, and HBOSs, down 13%.

Curbing the panic: Will any reassuring statements by a government be sufficient to calm down the existing panic? I really don’t think that they will on their own. It feels like all reason is gone and markets are in a panicked freefall. Any piece of negative news is sending shares into a further tailspin. An average consumer probably does not have much faith in government promises given that the latter failed to prevent this calamity in the first place. We are being battered with a barrage of unexpected bad news from one hour to the next and it is unsurprising we don’t know what to trust in anymore.

My forecast is this: I fear such unprecedented market volatility and shocks will continue for some time until we have seen all the bankruptcies and bad debts come through and get resolved one way or another, with the downward trend bottoming out. This might take 1 or 2 years. Then the market will get a truer sense of economic realities and start rebuilding confidence slowly.

However, if you have a cool head and some wits about you, and a little bit of money, now is probably the time to start buying into stock market indices – e.g. tracker funds. I would not want to buy individual shares unless I knew what I was doing.

The above comment is the author’s own view and does not constitute investment advice.

Copyright 2008 CuriouslyInspired