World stocks tumble on AIG's $61.7bn loss

Click to follow
The Independent Online

World stock markets tumbled today, with the Dow slumping below 7,000 for the first time in over 11 years after insurer American International Group reported a staggering $61.7bn quarterly loss and stoked renewed concerns about the health of the US financial system.

The Dow Jones industrial average plunged below 7,000 — a level it hasn't traded below since 28 October, 1997 — and the FTSE 100 sank over 4.5 per cent to lows not seen since April 2003. The index fell to 3,653 before recovering slightly to be down 3.9 per cent at 3,681.96. Japan's benchmark dropped 4 per cent.

Elsewhere in Europe, Germany's DAX fell 2.6 per cent to 3,743.70, and France's CAC 40 lost 2.6 per cent at 2,633.45.

In morning trading in New York, the Dow fell 1.8 per cent to 6,937.25 after AIG posted the largest quarterly loss in US corporate history. The credit crisis and recession have now slashed half the Dow's value since it hit a record high over 14,000 in October 2007. The broader Standard & Poor's index lost 1.8 per cent to 721.84, and the Nasdaq 100 composite index shed 1 per cent at 1,363.87.

"The weakness seen around the world today shows that investors continue to have precious little faith in the various bailout and stimulus packages and have once again been forced to revise their expectations about just how bad the economic situation could get," said David Jones, chief market strategist at IG Index.

In London, HSBC led the decline after it reported a 70 per cent drop in 2008 net profit and said it would raise £12.5bn ($17.7bn) in new capital through a share issue while cutting 6,100 jobs in the United States. Shares in Europe's largest bank by market value plummeted 20 per cent but still remained above the rights issue price.

"It has been reasonably well-flagged they were going to raise money, but when you get £12.5bn announced it's still quite a lot of money for people to find," said Jane Coffey, head of equities at Royal London Asset Management.

Other banks also pulled the markets down. Lloyds Banking Group and Standard Chartered both lost more than 10 per cent. In Paris, BNP Paribas slipped 7 per cent, and in Frankfurt Commerzbank plunged 5 per cent.

Concerns that European economies would continue to suffer lingered after German Chancellor Angela Merkel and other EU leaders flatly rejected a new multibillion euro bailout for eastern Europe at a summit in Brussels yesterday. They suggested that additional aid be given to struggling nations only on a case-by-case basis.

"Over the weekend we haven't really had a great deal of help from the governmental discussions, with eastern Europe still looking in a horrible state and not really getting the support from the rest of Europe, so again that's another concern — that the economies are contracting quite aggressively," said Coffey.

As in the US last Friday, where Wall Street indexes retreated to 12-year lows, investors in Asia and Europe were shaken after figures showed US gross domestic product in the world's largest economy withered at a 6.2 per cent annual pace at the end of last year.

The decline, worse than most economists had expected, was America's sharpest since 1982.

Aggravating fears that the global economic crisis won't end anytime soon were signs that the world's financial firms, already infused with billions of dollars in government aid over the last year, need still more capital to make up for their colossal losses on bad assets.

Insurance stocks fell in Europe after news the US government would give faltering insurer AIG a $30bn bailout — its fourth government rescue. That followed last week's news that banking giant Citigroup agreed to turn over a huge stake, up to 36 per cent, to the U.S. government.

In Asia, Tokyo's Nikkei 225 stock average dropped 3.8 per cent to 7,280.15, while Hong Kong's Hang Seng lost 3.9 per cent to 12,317.46. Markets in Australia, Taiwan and Singapore shed about 3 per cent or more, while South Korea's Kospi plummeted 4.2 per cent.

Investors are increasingly worried because mounting losses in the financial industry raise the prospect of greater government stakes and other capital-raising moves that can ultimately dilute shares and lower their price. Furthermore, lending markets are likely to remain comatose as long as banks are teetering, making it near impossible for the world economy to stage any meaningful rebound.