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FRANKFURT — Fears that the United States is in a recession reverberated around the world on Monday, sending stock markets from Bombay to Frankfurt into a tailspin and puncturing the hopes of many investors that Europe and Asia will be able to sidestep an American downturn.
On a day when United States markets were closed in observance of Martin Luther King’s Birthday, the world’s eyes were trained nervously on the United States. Investors reacted with what many analysts described as panic to the multiplying signs of weakness in the American economy.
Shares of banks led the decline in many countries, underscoring that the subprime crisis continues to hobble the global financial system. On Monday, a big German state bank, WestLB, said it would report a loss of $1.4 billion in 2007 because of its exposure to deteriorating mortgage assets.
“There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “What we’re seeing, in Europe and Asia, is that the markets are pricing in a recession.”
The turmoil will put even more pressure on the European Central Bank, which has charted a different course from the Federal Reserve by warning that it might raise interest rates to curb inflation, rather than cut them, as the Fed has, to ward off a recession. Mr. Mayer and others predict the bank will be forced into an about-face in coming months.
While Asia has been less buffeted by the credit crisis than Europe, the Bank of China now appears vulnerable, with analysts predicting it will have to write down the value of its American mortgage holdings.
Investors in Asia have been in a state of denial about a possible recession in the United States, said Adrian Mowat, JPMorgan’s chief strategist in Asia. But now, he said, “there’s no debate about it.” The only question, he added is “how long and deep” a recession might be.
Fear of an American recession is causing global stock markets to plummet. In spite of the recovery plan outlined by American President George W. Bush, European exchanges experienced a “Black Monday”, in the wake of markets in Asia.
At close of trading, Tokyo finished 3.9% down, its lowest point since October 2005. Hong Kong was down 5.5% and Shanghai receded 5.14%. In Europe, Paris experienced its hardest fall in one session since Sep. 11, 2001 (down 6.83%), Frankfurt lost 7.16% and the London Stock Exchange dropped 5.48%.
What we are witnessing, says Stéphanie Antoine, economic specialist at FRANCE 24, is a real crisis of confidence. “It’s been going on since the start of the year. Every time the Dow Jones falls, it falls 2%, which is enormous. Wall Street is closed today, but the Dow Jones lost all its gains of 2007 last week.”
“There’s an old saying in the market that banks lead us into recession and banks lead us out,” Mr. Boehm of Nordinvest said.