Tokyo - China and Japan called for global cooperation on
Friday after a financial market rout signalled fear that Europe’s debt crisis
could spin out of control and the US economy may slide into another recession.
The comments from Washington's two biggest foreign creditors
pointed to growing concern of contagion as Asian stock markets tumbled
following Wall Street’s steep dive a day earlier. European markets hit a
14-month low in early trading.
French President Nicolas Sarkozy will discuss financial markets
with German Chancellor Angela Merkel and Spanish Prime Minister Jose Luis
Rodriguez Zapatero on Friday, Sarkozy’s office said in a statement.
In Japan, Finance Minister Yoshihiko Noda said global
policymakers needed to confront currency distortions, the debt crises and
concerns about the US economy.
“I agree that these subjects should be discussed,” he told
reporters a day after Japan intervened to sell yen. “Each problem is important,
but how to prioritise these issues is something to discuss from here on in.”
Japan sold yen on Thursday to try to cap the currency’s
rise, which puts its exporters at a competitive disadvantage.
There was market talk that it had intervened again on
Friday, although the currency bounced back quickly, which suggests Tokyo was
not in the market. The yen has become a popular safe-haven bet as concerns
about the United States and Europe grow.
China Foreign Minister Yang Jiechi said US debt risks were
escalating and countries should step up cooperation on global economic risks.
Yang, who is visiting Poland, called on the United States to
adopt “responsible” monetary policies and protect the dollar investments of
other nations.
The US Federal Reserve holds its next policy-setting meeting
on Tuesday, and economists say there is little more it can do to try to spur
growth. A flurry of weak economic data and Europe’s debt woes have fed fears of
a fresh recession, triggering Thursday’s sell-off on Wall Street, which was the
worst since the global financial crisis.
Some $2.1 trillion in market value was wiped off the MSCI
All Country World Index this week as of Thursday’s close, Thomson Reuters
Datastream showed, and that total looked set to rise on Friday as Asian and
European stocks fell.
IHS Global Insight said there was now a 40% chance the United States could slip into recession.
Cash is king
The market rout extended into Asia on Friday, where markets
skidded about 5%. Chinese lender China Everbright Bank Co delayed a planned
Hong Kong share offering of up to $6bn, sources told Reuters.
Japan and Switzerland are trying to reduce the allure of
their markets as safe havens and after gold has more than doubled in price
since the global financial crisis, many investors are having second thoughts
about seeking refuge in the precious metal.
With investment options running out, funds are flooding into
cash.
Bank of New York Mellon Corp said it had been overwhelmed
with deposits, prompting it to charge some big customers a fee.
Investors slashed positions after the European Central Bank
failed to include Italy and Spain in a fresh round of bond buying, even though
yields on their debt shot above 6%, the highest level since the euro was
launched over a decade ago.
ECB President Jean-Claude Trichet said there was not full
support in the central bank for the action, underscoring deep divisions within
Europe over how to handle a debt crisis that has forced Greece, Ireland and
Portugal to seek bailouts.
Investors worry that Italy and Spain, the euro area’s third-
and fourth-biggest economies, could be next.
Sarkozy said France, Germany and Spain had talked to
Trichet. US officials from the Federal Reserve, the US Treasury and the White
House declined to comment on whether they were holding any discussions with
European or Asian officials.
Investors had hoped the ECB would target Spanish and Italian debt in reviving its bond-buying stimulus programme, but it restricted the purchases to Irish and Portuguese securities, not Italy’s or Spain’s.
Roberto Perli, managing director at ISI Group and a former
staffer at the Federal Reserve, called the ECB’s action “mysterious.”
“It sent the wrong message,” he said.
Belying a sense of crisis, many of Europe’s policymakers are
still on summer vacation, although EU Economic and Monetary Affairs Commissioner
Olli Rehn broke away from his holiday to return to Brussels. He plans a news
conference on Friday.
Italian Economy Minister Giulio Tremonti voiced frustration
at the ECB’s response. When he talked to Asian investors, they had told him:
“If your central bank doesn’t buy your bonds, why should we buy them?“
Longer term, some sort of supranational fiscal authority was
needed, transferring some of the debt burden of troubled countries to the
region as a whole, analysts said. That option is not seen as politically
palatable to Germany and France now.
Analysts said they would look to see if European leaders are
willing to expand its emergency financial stability fund to an amount that
would put a floor under the market panic.
They say the fund, currently €440bn, would need to be
doubled or tripled to cover economies as big as Italy and Spain.
US problems compound uncertainty
In the United States, a similar sense of political paralysis
reigns.
Just days after a bitterly fought, last-minute deal to raise
the country’s debt ceiling and avoid default, realisation has sunk in that many
elements of the $2.1 trillion deficit reduction plan are short term and not
locked in place.
Doubt has spread through markets that Congress will stick to
implementing it in full after the November 2012 elections.
This, combined with a bout of poor economic data, points to
a heightened risk of another slump. Lawrence Summers, a senior adviser to the
US president until last year, argued in a Reuters column that there is a one in
three chance of recession in the United States.
US employment numbers will be critical to market sentiment. Forecasts are for a tepid 85 000 jobs added in July, but a weak number or even contraction would boost concern that the United States is heading into recession.
The US jobless rate has risen for three consecutive months,
and another increase would send a strong recession signal, Goldman Sachs said.
Many economists say chances are slim that Congress would
endorse a further round of fiscal stimulus now that it is focusing on fiscal
spending cuts.
"I don’t see a well functioning government that can do
something," said Jeff Frankel, economics professor at Harvard University and
former White House economic advisor under Bill Clinton. "If everything is
blocked politically, especially fiscal policy, there’s nothing much you can
do."
Options for the Fed are also severely restricted.
Policymakers appear reluctant to embark on another round of bond purchases,
particularly given how controversial the last programme proved to be.
Still, Fed Chairperson Ben Bernanke has noted other options,
such as bolstering its assurance that rates will stay low for an extended
period.
Nonetheless, few expect such efforts to have much of an
impact, particularly since the economy’s chief problem at the moment appears to
be a lack of jobs, not credit.