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.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
musicOfficial chart could be moved to accommodate Friday international release day
Wes Brown is sent-off
Italy celebrate scoring their second try
six nations
Glenn Murray celebrates scoring against West Ham
footballWest Ham 1 Crystal Palace 3
Arts and Entertainment
Drake continues to tease ahead of the release of his new album
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review