Market plunge is storm warning for world leaders

DAVOS, Switzerland Tue Jan 22, 2008 7:36am EST

1 of 2. A technician makes a light check on the stage at the venue of the World Economic Forum (WEF) in the Swiss Alpine resort town of Davos January 22, 2008.

Credit: Reuters/Stefan Wermuth

DAVOS, Switzerland (Reuters) - This week's stock market slide provides a stark storm warning for global business leaders and policymakers meeting in Switzerland, as pleas for some form of coordinated policy response rise.

Some of the biggest one-day losses in European and Asian equities since the September 11, 2001 attacks on the United States are set to make the mood at this year's meeting of the world's political and economic elite in the Swiss ski resort of Davos even icier than the weather.

A U.S. recession and global economic slowdown this year is now firmly in investors sights and Tuesday's reaction on Wall Street, closed Monday for a holiday, is now anxiously awaited.

But what analysts fear most is that the latest equity lurch had few immediate triggers beyond rapidly evaporating confidence that the economic downturn can be avoided.

With financial market confidence at such a low ebb, investors can only hope for some united front from the massed ranks of central bankers, treasury chiefs and corporate executives in Davos this week. And even then, concerted action -- more than words -- may now be needed.

As the stock slide continued in Asia and Europe on Tuesday, market traders murmured of a possible emergency U.S. Federal Reserve interest rate cut and then of coordinated cuts from central banks across the Group of Seven top economic powers.

"Rate cuts are the only thing that are going to kick this market back up," said one UK equities trader.

Spokespeople at the European Central Bank, Bank of England and Swiss National Bank, contacted by Reuters, would not comment on the rumors cited by traders. No one at the Federal Reserve was immediately available for comment, following Monday's U.S. holiday.

Likely or not, there was little doubt some policy response in words or deeds was deemed necessary to halt the rout.

"To really help improve things, a truly positive surprise is necessary," said Jim O'Neill, chief global economist at Goldman Sachs, adding that moves like a relaxation of the proposed Basel 2 international capital adequacy rules for banks might be needed to calm the worst fears for the stretched banking system.

As banks report eye-watering full-year losses from the credit and mortgage market shock since last summer, they are starting to rapidly scale back lending to businesses and consumers and the macroeconomic outlook is deteriorating.

The chances of something as detailed as changes to global bank capital rules materializing quickly may be low. But a coordinated line on the problem will be demanded.

Financial market veterans frequently note that one of the catalysts for the 1987 stock market crash was very public disagreements between the United States and Europe over the appropriate monetary and fiscal policy actions needed.

Billionaire investor George Soros, expected at Davos later, said the world was facing the worst financial crisis since World War Two and the United States was threatened with recession, according to an interview with the Austrian daily Standard.

"The situation is much more serious than any other financial crisis since the end of World War Two," Soros was quoted as saying.

CRITICAL MASS AT DAVOS?

Some of the policymakers necessary to form a critical quorum at Davos have dropped out of the event over the past week due to intense domestic demands.

U.S. Treasury Secretary Henry Paulson and British finance minister Alistair Darling have both withdrawn at short notice.

But top central bankers such European Central Bank President Jean-Claude Trichet, Bundesbank President Axel Weber and New York Federal Reserve chief Timothy Geithner will all be speaking between Wednesday and Saturday.

And the U.S. Treasury delegation still includes Under Secretary for International Affairs David McCormick, a key diplomat at next month's critical G7 finance meeting in Tokyo.

International Monetary Fund chief Dominique Strauss-Kahn and the head of Organisation for Economic Cooperation and Development Angel Gurria both address the Davos meeting.

WHAT'S THE WORRY?

Even though the root of last year's sudden reversal of global economic fortunes lies in a U.S. real estate bust, the financial seizure was essentially global.

But the global policy response and rhetoric -- apart from last month's relatively successful though limited central bank action to defuse tensions in bank-to-bank lending -- is uneven.

On one hand, the Fed and U.S. Treasury have almost spooked investors with the extent to which they have signaled deep further rate cuts and tax relief already this year.

Yet some investors -- fearful a full-blown recession may already be underway in some U.S. states -- reckon that even a planned U.S. fiscal stimulus of one percent of national output and further Fed easing may not take hold soon enough to prevent a painful economic contraction.

Yet, in Europe the ECB doggedly refuses to take its eye off elevated inflation and has signaled no imminent easing of monetary policy even as private forecasters downgrade the euro zone growth outlook to well below 2 percent.

While British Prime Minister Gordon Brown has called for the IMF to take a lead in international financial crises, Britain's own response to the global crisis is clouded by its focus on rescuing stricken mortgage lender Northern Rock.

But whatever the obstacles to concerted policy moves, the market slide will certainly focus minds in Davos and traders will watch all suggestions of action with nervous interest.

The U.S. recession is unlikely to leave the rest of the world unscathed and markets are starting to discount that.

"The (latest equity market) falls pull the last rug from under the hope of decoupling," analysts at Lombard Street Research told clients in a note on Tuesday.

For full coverage, blogs and TV from Davos see: here