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World financial collapse looms as credit crisis deepens

World shares fall on credit fears

Markets have faltered in Friday trading a day after markets in the US and Europe suffered heavy losses amid fears of a global credit crunch.

By the close of trade in Japan, the Nikkei share index was down 406.5 points, or 2.4%, at 16,764.1.

Japan's central bank followed the European Central Bank in pumping money into the market to boost liquidity.

In London the benchmark FTSE 100 opened nearly 2% lower, the French Cac opened down 1.83%, and German Dax down 1.9%.

It comes a day after the FTSE closed down nearly 2%, and following an overnight decline of close to 3% on the Dow Jones index in New York.

The Bank of Japan injected one trillion yen ($8.5bn; 4.2bn) into the financial system on Friday.

Global markets have been rattled by worries over financial institutions' exposure to bad credit in the US sub-prime mortgage market.

In Hong Kong the Hang Seng index ended the day down 2.88% at 21,799.96, after trade was suspended early because of a tropical cyclone warning.

South Korea's central bank said it would also intervene if necessary in financial markets to counter the international turmoil.

Central banks in several countries have been intervening in the money markets to prevent a continuing problem with US housing loans turning into a global financial crisis.

The Reserve Bank of Australia on Friday added more than twice the usual amount of money into the banking system, injecting A$4.95bn ($4.19bn; 2.08bn) in its regular morning money market operation.

Central banks in Malaysia, Indonesia and the Philippines intervened to sell dollars to support their currencies.

On Thursday the US's main Dow Jones index fell 387.18 points, or 2.8%, to 13,270.68. The S&P 500 shed 3% and the Nasdaq lost 2.2%.

European indexes had slumped earlier after BNP Paribas froze three funds, saying the market for some of the assets they contained had disappeared.

The European Central Bank injected a record $130.6bn (64.6bn) into Europe's money markets to prevent a financial system seizure.

In the US, the Federal Reserve was reported to have taken similar action, pumping about $24bn into the US banking system.

Analysts said that the markets would remain volatile in the near future.

"The nervousness has been brought on by the perception that many more financial institutions may come out in the future to say they have been making losses on the back of the sub-prime problems," said Martin Arnold, equities economist at CommSec.

Housing market wobble

BNP Paribas announced on Thursday that it was suspending three investment funds worth 2bn euros because of problems with the US sub-prime mortgage sector.

Sub-prime lenders offer loans to consumers with a poor credit history.

In recent months, the number of loan defaults has increased because of higher interest rates, raising concerns that the wobble in the housing market will affect other parts of the economy and then start hurting other nations.

The worry is that should banks make losses, it would hurt their earnings and their profitability, making them less willing to fund the takeovers and buyouts that have underpinned much of the stock markets' recent gains.

The recent collapse of American Home Mortgage, the 10th largest lender in the US, has intensified those concerns.

At the same time, banks have suddenly started charging significantly more for the money they lend to each other, signalling that they are looking to limit their risks, analysts said.

Analysts say that a credit crunch - when it becomes harder for banks, companies and consumers to get access to loans and cash to run their operations - is a serious occurrence that could lead to a recession.

The declines in the US markets came despite attempts by President George W Bush to calm market fears.


BBC News, "World shares fall on credit fears", 10 August 2007.

"The Insider" mailing list article, 10 August 2007.

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Tags: world, financial, collapse, crunch, stock-market, crash, credit, recession, , conspiracy theories.

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