08/27/1998 21:47:35 FOCUS-As Russia fears mount, global crisis spreads
(Updates U.S., Canadian and Latin American markets)
By Richard Melville
NEW YORK, Aug 27 (Reuters) - Fears of a global economic
downturn intensified Thursday as the Russian crisis worsened
and the spreading financial pressure appeared to claim a new
victim in Canada.
In the latest developments, Russia's main stock index
reached a record low, the rouble continued a free-fall that has
stripped it of any measurable value and the Kremlin denied
repeatedly rumors of President Boris Yeltsin's resignation.
Stock markets across the Americas were sharply lower in an
acceleration of the selling pressure faced Wednesday.
The Dow Jones Industrial Average fell 357 points, or 4.2
percent, the biggest point drop since its record 554-point fall
on October 27, 1997, but well short of its largest percentage
The index closed Thursday at 8,165.99, down 1,172 points,
or 12.6 percent, from the record 9,337.97 it set on July 17.
Emerging markets in Latin America continued to receive a
pummeling, with Mexico's main equity index down 6 percent,
Venezuela and Brazil down 10 percent and Argentina 11 percent.
The losses across the Americas followed sharp declines in
Europe, where Germany's DAX index of leading shares tumbled 3.3
percent and London's FTSE-100 index of British blue chips slid
"I think we are having a frantic exit from equity markets
across the world. People are concerned and they are raising
cash," said Michael Metz, managing director at CIBC
The U.S. 30-year treasury bond - considered to be the
safest long-term investment in the world - surged on fierce
demand. Its yield reached a new record low of 5.34 percent.
The global crisis, which started in Asia and quickly
rippled through emerging economies worldwide, has also
accelerated a wave of deflation in commodity markets.
The benchmark CRB index of global commodity prices fell to
the lowest level in 21 years. Gold, historically used as a
hedge against inflation, was near 18-year lows amid fears that
Russia will be forced to sell gold reserves to raise
desperately needed cash.
Pressure on commodities brought pressure on some of the
more developed economies like Canada and Australia that rely
heavily on commodity exports.
The currencies of both Australia and Canada have been
battered and on Thursday, Canada became the first Group of
Seven (G-7) state to show signs of succumbing to the
The Bank of Canada, faced with a Canadian dollar at its
weakest levels in more than a century, resorted to extreme
measures with a sharp interest rate increase.
"Today's increase in interest rates is aimed at providing
support for the Canadian dollar in order to bolster confidence,
while preserving monetary conditions that will help to sustain
the present noninflationary expansion of the economy," the
central bank said afterward in a statement.
The move was criticized as "too little, too late," in
currency markets and failed to reverse the weakening in the
Canadian dollar. It also sparked a sharp sell-off among
Toronto's key index was down more more than 8 percent
before recovering about half its losses late in the day.
Earlier, in Russia, the central bank suspended all foreign
currency trade on the main exchange for the second successive
day in the hope of preventing an all-out rout of the rouble.
Some now think Russia has no choice but to introduce
stricter capital controls, effectively ending a seven-year
attempt to create a market-led, Western style economy.
"What is going on right now is that they are in the process
of making the rouble a non-convertible currency," said Lawrence
Austen of MFK Rennaissance in Moscow.
A spokesman for Acting Prime Minister Victor Chernomyrdin
said the premier was ready to act. But the spokesman added:
"You play it step by step, because the situation is so
France, another G-7 member, said Thursday the international
community was convinced it needed to help Russia but Moscow had
to push through more reforms.
Evidence of the direct harm Russia's woes were inflicting
on banks mounted Thursday when Republic New York Corp. said it
would record a charge of $110 million for losses on its Russian
investments, wiping out earnings for the period.
On Wednesday, Credit Suisse Group disclosed Russia-related
losses at its Credit Suisse First Boston investment bank unit.
However, Credit rating agency Standard & Poor's said
Thursday afternoon the deteriorating Russian situation would
not have any immediate impact on major U.S. banks and
securities firms. It cited Republic New York as an exception.
Bank stocks were by far among the weakest in U.S. trading
on Thursday, with several indexes of major bank stocks falling
by about six percent.
((-- Wall Street desk, 212-859-1730))