G7 meets in white heat of Clinton crisis

Markets fear that political problems will swamp efforts to avert financial disaster

CITY traders arriving at their work stations tomorrow morning will keep one eye cocked on Washington, where President Bill Clinton is fighting impeachment, and the other on an emergency G7 meeting in London - called to tackle the Russian crisis.

"It's like 1974 when Watergate incapacitated the West's response to OPEC's oil price hikes," said Allied Kemper Financial analyst, David Hale. "There's a crisis of political leadership at a time of profound economic turmoil."

World stock markets were subdued on Friday after frightening falls on Wednesday and Thursday. The FTSE 100 Index closed down 18 at 5,119 after briefly dipping through 5,000. The Dow Jones Industrial Average closed up 180 points. or 2.4 per cent, at 7,795.

What traders will attempt to assess as they arrive in their offices is whether there are more market shocks to come or whether the time has arrived to begin assessing the damage against a manageable background of deteriorating sentiment and economic growth.

City sentiment is distinctly bearish. A Nomura economist, James Mitchell, said: "There is a growing risk of a recession in the US. If things get out of hand, it could last a few years."

City traders last week speculated about a co-ordinated cut in interest rates by the G7. The Federal Reserve chairman, Alan Greenspan, said in a speech in California a fortnight ago that the US central bank was no longer biased toward an increase in interest rates. On Wednesday, Japan cut a key interest from 0.5 per cent to 0.25 per cent, although a BT Alex. Brown currency strategist, Pippa Malmgren, dismissed the move as an emergency measure to shore up the Japanese banking system which is staggering under at least $500bn (pounds 300bn) of bad debts.

On Thursday, the Bank of England's Monetary Policy Committee announced there would be no change in the 7.5 per cent base rate this month, but hinted that it might cut rates in future if the international situation warranted it.

Still, even a cut in interest rates might not reverse City sentiment. "The UK and US can cut interest rates, but it would only stop the markets from falling for a while," Nomura's James Mitchell said.

Others worried that hints about interest rate cuts are being prompted by central bankers' fears that liquidity in the international financial system is drying up. The International Monetary Fund has insufficient reserves left to bail out Brazil, the largest economy in Latin America, now facing a run on its currency. There were also fears in the City last week that Western banks could get caught in the liquidity crunch.

On Friday, Lehman Brothers issued a statement asserting that it was financially sound after rumours swept the City and Wall Street that the US investment bank might be forced to file for bankruptcy.

But bankers said that several top Wall Street banks had suspended lines of credit to the firm. Russia's National Reserve Bank threatened legal action against Lehman before collecting $6m owed it.

"We did a yen-dollar swap with Lehman," said Yuri Kudimov, NRB's first deputy chairman. "When the yen fell against the dollar we made margin calls. When the yen came back against the dollar, we asked for the margin calls back. They refused." Lehman is understood to have now returned the cash.

In the face of turmoil on multiple political and financial fronts, investors have retreated to the safety of government bonds in their home markets. There has been a strong rally in US Treasuries over the past few days.

On Friday, the yield on Germany's benchmark 10-year government bonds fell to 3.99 per cent, the first time ever below 4 per cent.

If the political melodrama in Washington resolves itself in a restoration of confidence in the authority of the White House, and if the G7 meeting reassures investors that the industrial nations are making effective moves to stabilise the financial system and stem the panic in emerging markets, then the worst of the financial crisis could be over.

Voices
Mosul dam was retaken with the help of the US
voicesRobert Fisk: Barack Obama is following the jihadists’ script
Arts and Entertainment
Loaded weapon: drugs have surprise side effects for Scarlett Johansson in Luc Besson’s ‘Lucy’
filmReview: Lucy, Luc Besson's complex thriller
Arts and Entertainment
tvExecutive says content is not 'without any purpose'
News
A cleaner prepares the red carpet for the opening night during the 59th International Cannes Film Festival May 17, 2006 in Cannes, France.
newsPowerful vacuum cleaners to be banned under EU regulations
PROMOTED VIDEO
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Travel
Flocking round: Beyoncé, Madame Tussauds' latest waxwork, looking fierce in the park
travelIn a digital age when we have more access than ever to the stars, why are waxworks still pulling in crowds?
News
London is the most expensive city in Europe for cultural activities such as ballet
arts
Arts and Entertainment
Jeremy Clarkson has rejected criticisms of his language, according to BBC director of television Danny Cohen
tv
Extras
indybest
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Application Support - Enterprise Java, SQL, Oracle, SQL Server

£45000 - £55000 per annum: Harrington Starr: A well-established financial soft...

Service Desk Analyst (Graduate, Helpdesk, Desktop, Surrey)

Negotiable: Harrington Starr: Service Desk Analyst (Graduate, Helpdesk, Deskto...

Service Desk Analyst (Graduate, Helpdesk, Desktop, Surrey)

Negotiable: Harrington Starr: Service Desk Analyst (Graduate, Helpdesk, Deskto...

Junior Quant Analyst - C++, Boost, Data Mining

£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

Mackay, Moody and another grim day for English football

The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
La Liga analysis: Will Barcelona's hopes go out of the window?

Will Barcelona's hopes go out of the window?

Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape