Markets worldwide tumbled for the second straight day as investors remained jittery amid warning from leaders that turmoil in global financial market could get worse.
A day after Wall Street icon Lehman Brothers sought bankruptcy protection and rival Merril Lynch agreed to sell itself under growing financial strain, in developments that could reshape the financial landshape, investors got another jolt on Tuesday. Rating agencies downgraded American Insurance Group, complicating efforts to save the insurance giant from collapsing.
Central banks swung into action, pumping in billions of dollars to prevent money markets from falling into a tailspin, but there was little to reverse the slide in stock prices.
“We are facing an unprecedented financial crisis” Dominique Strauss-Kahn, managing director of International Monetary Fund, told French news agency AFP in Cairo.
Strauss-Kahn said the crisis is a tough one to tackle because it stems from “the heart of the system,” which is the United States.
What began as a housing bubble in the world's largest economy more than a year ago, and was then thought to involve few billions in bad debt, has since spilled over to other parts of the world, resulting in a global credit squeeze. The defaults are now estimated to top $1 trillion and are hitting banks and financial firms much harder than was expected earlier.
The result: investments are slowing and economic growth across the world is decelerating.
“The entire global economy will slow down by between a half and two percent" of growth, including in China and Europe,” Strauss-Kahn said.
"Something new is more dangerous than something that happens repeatedly, but a difference with (the Great Depression of) 1929 is that we have instruments which don't allow us to avoid the crisis but to soften the consequences and correct their effects."
Several other leaders agreed.
“It’s clear that this financial market crisis is the worst worldwide in decades — and it is not over,” said Peer Steinbrueck, Germany's finance minister.
In India, stocks managed to hold steady on Tuesday after falling 3.3 per cent on Monday. The Reserve Bank of India injected nearly Rs 6000 crore ($1.32 billion) into the money market through a refinance operation.