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.
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