Africa: Wall Street Takes World to the Brink of a Crash

Renée Bonorchis
Johannesburg

THE world teetered on the brink of a stock market crash yesterday as news of the collapse of Wall Street firms Lehman Brothers and Merrill Lynch filtered through, causing major losses at bourses around the world, including the JSE.

This led to increased speculation about a global recession and systemic financial risk.

It started with Lehman Brothers, which yesterday filed for bankruptcy with more than $613bn in debt. Then came Merrill Lynch, which was sold in something of a fire sale to Bank of America for $50bn. And then there was the news that American International Group (AIG), the largest US insurer by assets, needed a $40bn bale-out.

Alan Greenspan, the former chairman of the US Federal Reserve, said it was the worst financial crisis in at least 50 years.

"It's a complete nightmare," Dennis Dykes, chief economist at Nedbank, said.

Although experts agreed SA's banking system remained intact and the country's savings were safe, Alan Pullinger, CE of Rand Merchant Bank, said it was a terrifying time for small banks and the crisis could "drag the whole world into recession".

Errol Kruger, registrar of banks at the Reserve Bank, said although market conditions were like witnessing "a murder in your next-door neighbour's house", South African banks were only marginally exposed.

"Of course it all depends on the validity of their documentation," he said, but any trading contracts between local banks and the foreign banks in question would be settled by the International Swaps and Derivatives Association (ISDA).

Jacko Maree, CE of Standard Bank, said his bank had a number of unsettled trades with Lehman and Merrill that were not going to be honoured. But, he said, they would all be covered by the ISDA, although it would be a tedious administrative process.

"Our banks do not have massive reliance on foreign funding. They are more often counter-parties to the foreign banks so it's possible there will only be a small percentage of impact," Neville Chester, banking expert at Coronation Fund Mangers, said. "SA's savings are 100% safe.

It will be the shareholders in Lehman's or Merrill's who will have to bear the cost."

The JSE at its worst was 4% down but recovered marginally in the afternoon to close at 25642 points after the US opened lower but did not crash. It was similar with the rand -- a shaky day but it regained more than 20c against the dollar in late trade. Bond yields were all over the place and ended slightly firmer. Platinum and palladium plummeted while gold, the safe-haven metal with little industrial demand underpinning its price, gained almost 1,5% to $777 an ounce.

But the jaw-dropper in commodities was Brent crude oil which, due to an expected slump in global demand, hit a low of $91,17 a barrel -- levels not seen in eight months. The price fall-off would be offset by the weakening rand, but should still contribute to lower inflation over time, Chester said.

Apart from mining companies, some of the hardest-hit stocks yesterday included Investec, Old Mutual, FirstRand and Sanlam. Of these, only Old Mutual had any serious exposure to the mess in the US, but Investec with its London listing was pummelled anyway.

Chester said the global financial system faced a similar problem in the late 1980s during the savings and loan crisis. "Hundreds of banks went under. This is on an equivalent scale; people's memories are just short," Chester said.

Just like last time, second-round effects have to be considered. One South African government official said although no one was having sleepless nights yet, there was a deepening concern about how the crisis might spread.

For his part, Kruger was upbeat that the Reserve Bank had been strict about selling local banks to foreign buyers. "That's been the strategy all along -- that the banks are largely locally owned," he said. "All the advantages of having foreign players in SA are now disadvantages. There has been a 180-degree turnaround."

Dykes said local banks had been prudent and it was a "blessing" that they had not been able to play fully in international markets.

"There is immense uncertainty. Cash is pretty much king right now." With all asset classes getting hammered and emerging markets being knocked about, there was little place for an investor to hide.

Dykes said such times presented opportunities. "It looks like we won't be sucked into the same sort of forces governing other markets. Even in the 1930s, people made money picking the bottom of the market."

Source: www.allAfrica.com

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