AS GEORGE Bush sits down with ministers from the world's seven richest developed nations this weekend he may draw on the experience of the little known English monarch, King Canute. He famously took his throne to the seashore in an attempt to halt the incoming tide. As the waves licked around the ankles of the king he realised that it was impossible for one man to stem the colossal might of nature.
On Friday afternoon as Bush strode into the Rose Garden of the White House the parallels with Canute were clear. With the world's financial markets looking on, Bush attempted to command an end to the financial storm blowing violently out of control.
"The US government is acting," he said. "The Federal government has a comprehensive strategy. We can solve this crisis and we will."
By Friday evening, with stock markets still in meltdown, it became apparent that Bush too had failed.
This week analysts predict that the waves of market turmoil will continue as the chaos spreads to carmakers, basic materials and energy companies. Oil producers such as Statoil, Royal Dutch Shell and Total will get seriously hit as oil continues its descent to around $82 a barrel.
"US carmakers will be worse hit than European carmakers due to the extended financial services they provide for its customers," said a report by stockbrokers Saxobank. "However, we still expect European carmakers to be hit and BMW and Daimler will be the worst performers."
Whatever the G7 decides this weekend every sector will be looking nervously over its shoulders after the most turbulent five days in economic history since the Great Depression. In London the FTSE 100 Index endured its worst week since the Black Monday crash of 1987, plummeting 21% and wiping more than £250bn off the value of top-flight stocks in the process. For City traders the week ended as it began – in utter panic.
On Monday morning the FTSE saw its largest one-day points fall. On one of the most frenetic trading days since the financial crisis began, the FTSE 100 index closed down 391.1 points lower at 4589.2. The 7.85% fall has been surpassed only twice before – on the first two days of the 1987 stock market crash.
In an attempt to quell the panic Alistair Darling issued a hastily worded statement saying he will do "whatever is necessary" to bring stability to the banking system. The market is not impressed – more than a £100bn is wiped off the value of the leading 100 companies. With the lack of a co- ordinated rescue plan for the sector alarming the City, confidence in the banking sector was shattered. Across the world $2,500bn was wiped off the value of shares as the Dow Jones, Nikkei and Hang Seng all ratcheted up heavy losses.
Tuesday was even worse as shares in major UK banks plunged after it was reported that leading players from the sector had held talks about a plan for the Treasury to offer a multi-billion pound injection of capital. The news devastated Scottish banks; HBOS plunged 41.5% to close at 94p a share and Royal Bank of Scotland fell dramatically down 39% to close at 90p.
Iceland's economy imploded. In an unprecedented turn of events its government seized control of the country's top three banks, started then abandons an attempt to fix the value of Iceland's currency and closed the stock market until tomorrow.
On Wednesday Gordon Brown moved, announcing a comprehensive rescue package for Britain's ailing banks, tackling the problem of capital, liquidity and funding. The move was followed by a coordinated cutting of interest rates from the world's biggest banks.
The Bank of England cut the base rate by half a percentage point, to 4.5%. America's Federal Reserve cut rates by the same amount, to 1.5%. And the European Central Bank and the central banks of Sweden, Switzerland and Canada joined the effort to tackle the financial crisis.
In a three-pronged attack the Treasury made up to £50bn available to banks as injections of state money to raise their "tier-one" capital, the bedrock support for banking business.
Secondly, the Government doubled the amount of money available to banks through the Bank of England's "special liquidity scheme", enabling banks to swap illiquid mortgage-backed securities for Treasury bills, which can be readily cashed, for up to three years. This was raised to £200bn. Third, the Treasury guaranteed new short and medium-term debt issued by banks for periods of up to three years. But will it work?
"The truthful answer is that it has to," says Justin Urquhart Stewart, of Seven Investment Management. "There is no 'plan B'. The banking system is supposed to be a fast flowing river of financial liquidity, capable of providing enough resources for all to draw their water from. Whether for direct investment or just day-to-day financing and cash flow its uses are various and vital. Now this river has changed. It hasn't dried up, as there is still lots of money and finance around, but it has been jammed and dammed by the detritus of financial losses and loans acting just as much as a barrier as any real logjam. So as the river can't flow, its users cannot draw from it and function properly and when that happens, all will suffer."
But by Friday ministers and bankers were realising the action of one single nation was not enough. In a day of heavy selling the markets went into freefall. The UK's FTSE 100 index ended down almost 9%, France's Cac index closed down 7.7%, while Germany's Dax lost 8.4%. It becomes clear that a global approach is needed.
"It's time for the kitchen sink," says Charles Diebel, a rate strategist at Nomura. "As in, throw everything there is at the problem and in such scale that the 'shock and awe' breaks the current cycle of fear."
Early yesterday morning the G7 vowed to take all necessary steps to unfreeze credit markets and ensure banks can raise money. The finance leaders agreed to use all available tools to support "systemically important" financial institutions and prevent their failure, and ensure banks can raise capital "in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses."
The real test will come when the markets open tomorrow morning.
The full article contains 1080 words and appears in Scotland On Sunday newspaper.
