Weekly Financial News Roundup
Turmoil in the financial markets, wildly fluctuating share prices and definitive indicators of a global economic downturn – as if further confirmation were really necessary – dominated the financial news this week. This of course, in the wake of unprecedented events in Reykjavik last week, when the Icelandic government seized control of the struggling Landsbanki, Heritable and Kaupthing Singer and Friedlander banks – and even turned to the Russian Treasury for a loan of €4 billion – in an effort to avert wholesale economic collapse. Indeed even this week, Icelandic Prime Minister, Geir Haarde, was uncertain as to whether a Icelandic delegation would remain in the Russian capital or return home, but told a Reykjavik news conference, "it would be better if this could be resolved now", according to the Reuters website.
A weekend summit, attended by representatives of the British, French, German, and other European governments led on Monday to the announcement of far-reaching rescue and contingency plans to combat the growing financial crisis. These plans include the approval of hundreds of billions of Euros in loans to guarantee inter-bank lending and making government funds available for the purchase of stocks and shares in troubled financial institutions. Germany for example, announced a package worth €480 billion, in total, while France announced a guarantee of up to €300 billion on inter-bank loans. The British Prime Minister, Gordon Brown, had already announced a £50 billion (€64 billion) contingency for the likes of Royal Bank of Scotland, HBOS and Lloyds TSB. Mr. Brown, quoted on the BBC website said, "In extraordinary times, with financial markets ceasing to work, the government cannot just leave people on their own to be buffeted about." Announcements from across the continent had the desired effect on stock markets which rallied strongly as a result.
Iceland once again took centre stage on Tuesday, when it was announced that officials from the Local Government Association were meeting with government ministers to discuss not only the £1 billion (€1.3 billion) invested in Icelandic banks, by the 116 councils in England and Wales, but also the advice given to those councils prior to the current crisis. The British government has already set up a "rapid response" unit for those councils in immediate difficulty, and offered a loan of £100 million (€130 million) to the Icelandic bank, Landsbanki, for repayment to creditors in the United Kingdom. It is unlikely, however, that the situation in Iceland – in terms of how much can be recovered from the nationalised banks by depositors – will become much clearer before the middle of November.
By way of adding insult to injury, government figures released on Tuesday revealed that the number of people unemployed in the United Kingdom rose by a further 164,000 between June and August – the largest rise for 17 years – taking the overall rate to 5.7%. The number of current vacancies in the same period fell, confirming an economic downturn. The Consumer Prices Index in the United Kingdom too, reached its highest level for 16 years – rising from 4.7% in August to 5.2% in September – it was further revealed. This increase was fuelled (no pun intended), largely, by increases in energy bills, and, with oil prices falling, and the economy slowing down, generally inflation is widely anticipated to slow in response.
The main news stories for the remainder of the week revolved around unprecedented volatility in the stock markets, although, in a lighter moment, relatively speaking, the Audit Commission – the watchdog responsible for ensuring efficiency, and value for money, in national and local government spending – was forced to admit that £10 million (€ million) of its own funds are tied up in the troubled Icelandic banks, Landsbanki and Heritable, along with those of other British investors. A statement from the Audit Commission revealed, reassuringly, that the deposits were in "full compliance" with their philosophy and guidelines on "prudent investment" according to the BBC website. Titter ye not.
Meanwhile, poor U.S. retail sales figures, the growth of unemployment in the U.K., and other factors – not least indications that the mighty Chinese economy, which has experienced growth of 10% per annum, year on year since 2003 is itself, slowing down – sparked fears of a global recession in financial markets across the world. The U.S. Dow Jones index plunged by nearly 8% on Wednesday, and was followed by corresponding falls in share prices in Japan, the United Kingdom, and elsewhere. The benchmark Nikkei 225 stock average in Japan, fell by 10%, while the FTSE 100 index fell by 5.8% within minutes of opening.
The leaders of the G8 major industrialised nations – amongst them the U.S., U.K., Japan and Russia – were quick to respond to the impending crisis and in a joint statement promised to introduce measures to "remedy deficiencies caused by the current crisis" as reported on the Yahoo! website. British Prime Minister Gordon Brown, called for a restructuring of the International Monetary Fund (IMF) to stabilise financial systems across the world; the IMF is already prepared to loan up to €10 billion to Ukraine, for example, to remedy its debt and currency problems, and countries such as Iceland, Hungary and Serbia find themselves in similar positions.
To cap an already dramatic week in the financial markets, Wall Street share prices rallied strongly late on Thursday, such that the FTSE 100 also recovered strongly on Friday morning. Despite fears that the U.K. insurance industry may become embroiled in the banking crisis, the FTSE gained 4.5%, breaking back through the 4,000 point mark and the markets in France and Germany similarly opened strongly. The principle gainers in London were banks and insurance companies – amongst them Lloyds TSB, which may, or may not, be prevented from paying dividends to it shareholders under the government bailout scheme – but as David Buik, of BGC Partners commented on the Guardian.co.uk website, "The volatility is unbelievable – I've never seen anything like it".