Guardian Unlimited [[email protected]] Thu 16/08/2007 08:515pm update

16   Markets fall sharply

Vote: correction or crash?

Fiona Walsh and Katie Allen Thursday August 16, 2007 Guardian Unlimited

Shares in London plummeted more than 250 points today, sending the FTSE index crashing below 6,000 as the storm engulfing global stock markets intensified.

The FTSE 100 ended the day down 250.4 points, or 4.1%, at 5858.9 points - the lowest since September last year.

By the time of the London close, the Dow was more than 170 points lower, or 1.3% down, at 12,684.66. There were heavy losses throughout the market, particularly among the banks, as panicked traders dumped shares.

"What we are witnessing is a rapid unwinding of risk on a global scale," said Martin Slaney, head of spread betting at GFT Global Markets.

"Even traditional safe havens such as gold are deemed too risky in this climate," he added.

"In these extremely nervous market conditions, economic fundamentals have gone out of the window, and panic selling has set in."

He warned: "The days of easy credit are almost certainly over and the implications of this for everyone from hedge funds to homeowners are only now being realised."

Today's fall in London follows an overnight battering for Asian stocks, as the far east markets took their cue from Wall Street's heavy losses yesterday.

After a day of wild swings, a late plunge on Wall Street saw the Dow Jones Industrial Average end 167 points lower, at 12,861, taking it below the 13,000 level for the first time since April.

London had managed to withstand the worst yesterday but there was no place to hide today.

The crisis was sparked by defaults on sub-prime home loans in America.

Data today showing that US housing starts fell by a higher than expected 6.1% in July renewed fears about the health of the world's largest economy and served to deepen the market gloom.

As in London, banking shares were particularly hard hit.

Countrywide Financial, America's leading mortgage lender, underlined the severity of its difficulties as it tapped an $11.5bn credit line to stave off its growing cash crisis. A number of smaller lenders have already collapsed but Countrywide said it believes the "decisive steps" it had taken would enable it to meet its funding needs. Shares in the company lost more than 15% to $18.07.

There was fresh evidence in Europe of the spread of the contagion, as the insurer Zurich said it had invested $340m (171m) in sub-prime debt in the US and $479m in collateralised debt obligations (CDO). But this is out of total investments of $186bn, and chief financial officer Dieter Wemmer said the group had "no concerns on the credit quality of the CDO or sub-prime exposure".

Elsewhere around the world, shares in the Australian mortgage lender RAMS Home Loans Group crashed 60%, as the US credit squeeze left it unable to refinance $5bn in debt. The news unnerved already panicky traders in Sydney, where the market also suffered sharp losses.

In Tokyo, the Nikkei 225 index closed almost 2% lower, down 327.12 points at 16,148.49, after falling below the 16,000 level at one stage. Other Asian markets also suffered sharp falls.

The US Treasury secretary, Henry Paulson, insisted today that America could withstand the current turmoil. "The economy and the markets are strong enough to absorb the losses," Mr Paulson said in an interview on the Wall Street Journal's website.

The former Goldman Sachs chief executive said the global economy was in much stronger shape than in previous periods of market stress, and that the repricing of risk in markets was inevitable. He also said nothing should be done to guarantee market players against losses.

"One of the natural consequences of the excesses is that some entities will cease to exist," he said.