World Markets Stabilize, but Recession Fears Grow

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Matt Dunham / AP

People walk across the Millennium Bridge near St. Paul's Cathedral in London

The immediate euphoria that boosted world stock markets following the announcement of government plans to prevent broad financial collapse has now given way to longer-term worries that the world is entering a recession. After starting the week with two days of remarkable gains, markets in Asia and Europe Wednesday registered moderate losses similar to those of Wall Street, which dipped 0.82% on Tuesday. Like everyone else, traders are waiting for clearer signs of what the future holds.

Wednesday's activity reflected that measured concern dominating the ebullience that drove the previous two sessions. Apart from Tokyo's Nikkei — which ended the day 1.1% higher — bourses across Asia all slumped. Hong Kong's Hang Seng lost 5%, for example, following its 13% surge earlier in the week. Europe suffered similar shrinkage as London's FTSE 100 slipped 3.5% by noon, while Paris' CAC 40 and Frankfurt's Dax both shedded 3.1%. Some of that slippage, market analysts said, came from profit-taking on gains posted earlier in the week. But the major factor came from broader concern and confusion about just how bad — or not — the expected general economic downturn will be.

"Visibility is very poor, so it's impossible to see how badly the flagging real economy will be undermined by this," comments HervéGoulletquer, head of fixed income markets for French Investment Bank Calyon Crédit Agricole. "Growth in emerging markets next year had been expected to mitigate zero-growth anticipated in Europe and the U.S. After all that's happened, no one can say: this could be a mild slowing, or it could be severe."

Goulletquer applauds governments in the U.S. and Europe for committing to plans to save the world's finance system. Yet one of the main pillars of those rescue packages — guaranteeing loans between banks with the aim of unblocking frozen credit markets that most businesses and households rely on — has not yet provoked the intended reaction. And while it's still fairly early in the bailout game, political and business leaders are already viewing banks with growing impatience ast credit taps remaining shut.

Less than 24 hours after unveiling France's $488 billion rescue plan earlier this week, for example, French President Nicolas Sarkozy met with the heads of the nation's top banks to urge them to extend loans to creditworthy business and households "without delay or additional constraints." Sarkozy pointedly reminded bank presidents that freeing up such funds — a basic necessity for business development and economic growth — was one of the main reasons governments around the globe have pledged trillions of dollars in tax payer money to rescue the financial system in the first place.

"The president insisted on the fact that everyone has to play the game," said Laurence Parisot, head of the organization representing France's largest employers, Medef, after the meeting. "Now that banks have the means to operate more or less normally, they must assume their role of irrigating the economy so companies can likewise function normally."

In revealing an additional $63 billion aid package to Britain's top three banks Monday, Prime Minister Gordon Brown similarly tabled a document detailing the plan, which noted beneficiaries must maintain "over the next three years, the availability and active marketing of competitively priced lending to homeowners and to small businesses at 2007 levels". Such vivid expectation isn't limited to France and Britain. In virtually all countries whose financial systems are being bailed out by the state, governments are beginning to apply pressure for credit to finally being circulating again.

But even if banks were to open the taps, there are growing questions about whether that could buck other worrying trends. On Wednesday, Britain announced its unemployment rate had jumped half a point to 5.7% — its highest in eight years. Last month the government acknowledged that France lost 40,000 jobs in August despite predictions of a net gain. Unemployment data and generally sagging company results, observers say, reinforce the view that Europe has already entered a recession.

The question such a specter poses to both banks and governments is vexing: doesn't extending new loans to companies and individuals whose income might significant suffer during economic shrinkage risk creating the same sort of toxic debt that provoked the on-going global crisis in the first place?

"Of course it is — it's like giving an alcoholic more booze," says Gabriel Stein, director of Lombard Street Research in London, noting that while the degree of debt varies by nation, it's become a troubling factor for households and companies throughout the developed world. "Banks are being told to lend money to people who have already surpassed their borrowing capacity — and being told to do so under the same terms applied during the credit boom. It's not a good idea." But so far, no one seems to have come up with a better one.

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