• ACI Russia

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

3.2 percent.

"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

Canadian stocks.

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))

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