Confidence shaken

Confidence in the global economy declined in September as the financial turmoil in the US worsened, a survey of Bloomberg users on five continents shows.

The Bloomberg Professional Global Confidence Index fell to 11.3 from August's 14.1. Confidence among US respondents fell to 10.6 from 18.2, while the Western European measure was at 12.6 after 12.9. A reading below 50 indicates pessimism.

The yearlong credit squeeze has in the past two weeks led to the bankruptcy of Lehman Brothers Holdings Inc and the takeover of Fannie Mae, Freddie Mac and American International Group Inc. Overnight borrowing costs soared as banks hoarded cash.

"We're heading for a prolonged slowdown almost everywhere starting from the US," says Aurelio Maccario, chief euro-region economist of UniCredit Group in Milan, who took part in the survey. "Given the ongoing financial weakness, the slowdown may gather speed."

The MSCI index of financial shares has seen a sharp fall. The Federal Reserve said September 16 it would lend the country's biggest insurer, American International Group Inc, $85 billion to avert the worst financial collapse on record. A day earlier, Lehman Brothers filed for bankruptcy and Merrill Lynch & Co agreed to be taken over by Bank of America Corp.

About 3,500 Bloomberg users from Tokyo to New York responded between September 8 and September 12 as investors absorbed US Treasury Secretary Henry Paulson's bailout of Fannie Mae and Freddie Mac, which own or guarantee $12 trillion of US mortgages.

"We moved from Fannie and Freddie to Lehman to AIG, and even today, one question is: who is going to be next?" says Simon Barry, an economist at Ulster Bank in Dublin, another participant.

Credit losses

Banks worldwide have tallied more than $500 billion in losses and writedowns since credit markets seized up a year ago. Goldman Sachs Group Inc and Morgan Stanley, the two biggest US securities firms, tumbled the most ever in New York after the AIG rescue failed to ease the credit contraction.

"We haven't experienced anything like this since 1929," Former European Central Bank chief economist Otmar Issing, 72, said in a Bloomberg Television interview on September 16. "Global growth will slow and is already slowing. But overall, the risks have mostly been confined to a few industrialized countries."

Bloomberg users increased expectations that lower oil prices will allow central bankers to pare interest rates as the economic outlook deteriorates. In Germany, the measure for central bank-rate expectations fell to 34.1 from 42.7, signaling respondents in Europe's biggest economy now anticipate that the European Central Bank may cut its key rate in the coming six months. The gauges also declined in the US, Japan, and the rest of the euro region.

The price of oil fell by a third since touching a record $147.27 in July and traded at $92.70 a barrel in New York last Thursday.

"For global business confidence to improve two things are needed: the US housing market to bottom out and a sign that the financial turmoil is nearing an end," says Masamichi Adachi, a senior economist at JPMorgan Chase & Co in Tokyo. "That won't be until around the second quarter in 2009."

The cost of borrowing in dollars for three months jumped the most in nine years last Thursday as banks hoarded cash amid speculation more financial institutions will fail. The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association says.

Agencies

(China Daily 09/22/2008 page11)