The slump on Thursday was sparked by a triple whammy of warnings by large financial organisations that, well, they’re beginning to be a bit worried about state of the global economy. The International Monetary Fund kicked things off when its leader, Christine Lagarde, said the global economic situation was entering a ‘dangerous place’, while the World Bank’s Robert Zoellick said we’re entering a ‘danger zone’. Upping the syllable count slightly was the US Federal Reserve, which added its warning about ‘serious downside risks to the US economy’. That was too much for markets, which reacted by promptly throwing themselves on the floor, kicking and screaming.
Accordingly, the G20 took on the role of the harassed mother, presenting markets with the economic equivalent of a promise they might be able to go to the zoo if they stop crying – or, in this case, a commitment to ‘take all the necessary actions to preserve the stability of banking systems and financial markets as required’. Rather mealy-mouthed, wethinks. The G20 added it will follow up with a ‘bold action plan’ at the beginning of November. We can hardly wait.
Analysts were, not surprisingly, unconvinced by the G20’s rather slow reaction to what could, in the worst case scenario, amount to impending global financial doom. As Jeremy Stretch from bank CIBC told the BBC: ‘Markets work on a second by second basis, while politicians seem to be working to a monthly calendar’. In other words: by the beginning of November, markets could be nothing more than a heap of smouldering ashes. Negotiations, though, begin in Washington later today. As one analyst put it, that ‘should lay the framework for thoughts about quite significant actions’. Although to be fair, the last thing we need is for politicians to start panicking as much as traders.
The question now, of course, is whether China will ride to the rescue of the eurozone. Having sniffed around Italian bonds last week, it’s already shown a certain amount of willingness to help out (albeit with a long list of caveats). Having said that, Robert Peston points out this morning that, although Europe is one of its largest export markets, there’s a feeling among the Chinese that Europe and the US have ‘lived high on the hog for too long’. So there’s a sense that until the West is prepared to grovel, any rescue is unlikely.