Posted on 12-3-2003

Crisis Fears Grip London
by Larry Elliott and Charlotte Denny, Tuesday March 11, 2003,
<http://www.guardian.co.uk>The Guardian

Fears were being raised in the City (London business district) last night
about the threat of a financial crisis among insurance companies and banks
after share prices fell to their lowest level in seven and a half years.

The looming threat of war against Iraq, splits in the cabinet over
Britain's support for America and gloomy economic news drove the FTSE-100
index of leading shares down to less than 50% of its peak on the eve of the
new millennium.

Evidence of slowing sales on Britain's high streets together with the
renewed fall in the stock market raised fresh doubts about Gordon Brown's
growth forecasts in the run-up to the April 9 Budget. The chancellor has
pencilled in growth of between 2.5 and 3% this year, but City forecasters
are now expecting the economy to expand by just 2.2%. Michael Howard, the
shadow chancellor, last night sought to capitalise on the market fall,
which he blamed on Mr Brown's tax on pension funds back in 1997. "It is
time for the chancellor to take responsibility for the effect of his
policies on millions of holders of pensions and endowments," he said.

Since peaking at 6950.6 on December 30 1999, the share market has fallen
relentlessly. Yesterday it closed down 55.6 points at 3436, its lowest
level since July 1995.

London was not the only share market beset by a new wave of selling. In
Tokyo the Nikkei index closed at a fresh 20-year low, while in Germany the
Dax index was down 4% amid rumours of the imminent collapse of one of the
country's major banks. Wall Street, which has lost 8% of its value so far
this year, closed down 171.85 at 7,568.18.

Analysts said that a further collapse in UK share prices could force
Britain's financial watchdogs to take more aggressive steps in the wake of
last month's decision to relax solvency limits. "Equities cannot fall much
further without raising serious systemic risk," said Stephen Lewis of
Monument Securities. "The authorities will be expected to do what they can
to prevent a breakdown." Graham Turner of GFC Economics said the start of
a war would give a short-term boost to shares, but after a couple of months
the selling would probably recommence. "Banks and insurance companies would
suffer if the FTSE-100 approached the 3,000 level. That would be a real
problem," he said.

The governor of the Bank of England, Sir Eddie George, sought to reassure
the markets following a meeting of the world's leading central bankers in
Switzerland. "Germany is not headed for recession, nor certainly is the
euro zone - their expectation is for modest but positive growth and that
will be true of the United States, that will be true certainly for the
United Kingdom and true also of Japan," he said. But the markets focused
instead on the latest snapshot of consumer spending from the British Retail
Consortium, which showed the weakest growth in high street sales in four
years last month.

Bill Moyes, director general of the BRC, said: "The retail boom is clearly
over. Consumer sentiment is weak and the industry needs positive moves from
the chancellor to stimulate demand. We do not want sympathy; we want
action." The BRC blamed nervousness over the war for consumers tightening
their belts. Retailers fear that despite last month's quarter point cut in
interest rates from the Bank of England, dearer petrol, increases in
council tax and increase in national insurance will put the brakes on
spending for some months to come.

Consumer spending power could also be hit by the fall in the value of the
pound, which hit a fresh four-year low on the foreign exchanges yesterday.
Manufacturers are already feeling the effects of dearer imports caused by a
weaker currency and rising crude oil prices, which hit a two-year high of
$34.55 a barrel in London yesterday. Fuel and raw material costs rose at
their fastest pace in two years last month, according to government figures.