Recession fears push shares lower

European stock markets dropped today after Japan’s Nikkei tumbled more than 11% overnight amid mounting anxiety that the world economy is plunging into a deep and protracted recession.

The latest bout of selling in the markets was stoked by a record fall on Wall Street yesterday after weaker-than-expected US retail sales and a pessimistic assessment from the US Federal Reserve indicated that the world’s largest economy is already, or about to fall, into recession.

The FTSE 100 index was down 2.8%, while Germany’s DAX was 2.5%, down at 4,750.50. The CAC-40 in France was 3.3% lower.

The renewed selling meant that the world’s stock markets were more or less back where they were at the start of the week, before they breathed a sigh of relief on the unveiling of a series of bank rescue packages from governments around the world to restore confidence.

Meanwhile the Swiss government became the latest to announce its plans to support its banking system with billions of dollars.

The $250bn (€186bn) bank plan was criticised overnight for being insufficient by Japanese Prime Minister Taro Aso. He blamed the renewed drop in markets on an “insufficient” US bail-out plan.

Earlier Tokyo’s Nikkei 225 stock average slid 11.41%, its biggest drop since the 1987 stock market crash.

The long-term key is whether the flurry of activity by governments can actually break the logjam in credit markets.

Despite the co-ordinated interest rate reductions announced last week, and massive liquidity boosts, the rates at which banks lend remain abnormally high, despite some easing in rates and spreads this week. That could in turn make it harder for businesses and consumers to get the credit they need and hurt the economy.

The Hong Kong interbank offered rate, known as Hibor, for three-month loans actually ticked up slightly overnight to 4.35% after easing the past couple of days.

Although the rescue packages have helped alleviate the pressures on the banking system, they will do nothing to prevent a serious economic slowdown.

Concerns about the global economic outlook are clear also in the price of oil, which has fallen to $72.66, a new 13-month low.

In South Korea, the main index dropped 9.25% after ratings agency Standard & Poor’s said it may downgrade the credit ratings of some of the country’s leading banks.

And Hong Kong’s key index trimmed losses, closing down 4.8% after falling more than 8% earlier. Australia’s main share index fell 6.7% while India’s was down 4%.

The panic selling in Asia hit many sectors.

Meanwhile, insurance policies against companies failing to make good on their debt, known as credit default swaps, were more expensive – a signal that firms believe the risk of default is growing.