FRANKFURT - Fears that the United States is in a recession reverberated around the world yesterday and early today, sending stock markets from Frankfurt to Mumbai into a tailspin and puncturing the hopes of many investors that Europe and Asia will be able to sidestep an American downturn.
The world's eyes have been trained nervously on the United States, which did not have market trading yesterday in observance of Martin Luther King Day. Investors reacted with what many analysts described as panic to the multiplying signs of weakness in the American economy.
Shares of banks led the decline in many countries, underscoring that the subprime crisis continues to hobble the global financial system. A big German state bank, WestLB, said it would report a loss of $1.4 billion in 2007 because of its exposure to deteriorating mortgage assets.
"There is indeed some panic," said Thomas Mayer, the chief European economist at Deutsche Bank in London. "What we're seeing, in Europe and Asia, is that the markets are pricing in a recession."
Yesterday's sell-off was evenly distributed from West to East, with indexes plunging in London, Paris, Frankfurt, Tokyo, Hong Kong, Seoul, and Mumbai. The Frankfurt Stock Exchange's DAX index plummeted 7.2 percent, its steepest one-day decline since the Sept. 11, 2001, terrorist attacks. The 7.4 percent drop in Mumbai's Sensex index was the second-worst single-day tumble in its history.
The troubles continued after the Asian markets opened this morning. Japan's Nikkei 225 index, the benchmark for the continent's biggest market, stumbled after the opening bell and continued falling, losing 752.89 points, or 5.65 percent, to 12,573.05 by closing. The loss, the index's biggest since Sept. 11, 2001, follows a loss of 3.9 percent yesterday. The turmoil was the same in Hong Kong, Australia, and China, with markets plunging another 5 to 8 percent.
In India, trading was halted for about an hour this morning as its benchmark index fell 9.5 percent.
Investors were scarcely comforted by President Bush's announcement on Friday of an economic stimulus package of as much as $145 billion. Bush's "shot in the arm," economists said, did not persuade the rest of the world that the United States will escape a recession, or that it will either.
The turmoil will put even more pressure on the European Central Bank, which has charted a different course from the US Federal Reserve by warning that it might raise interest rates to curb inflation, rather than cut them, as the Fed has, to ward off a recession. Mayer and others predict the bank will be forced into an about-face in coming months.
While Asia has been less buffeted by the credit crisis than Europe, the Bank of China now appears vulnerable, with analysts predicting it will have to write down the value of its American mortgage holdings.
Investors in Asia have been in a state of denial about a possible recession in the United States, said Adrian Mowat, JPMorgan's chief strategist in Asia. But now, he said, "there's no debate about it." The only question, he added is "how long and deep" a recession might be.
The angst about the United States belies the popular theory that Europe and Asia are not as dependent on the American economy as they once were, in part because they trade more with each other. The theory, known as decoupling, has been used to explain why economies like China and Germany have kept growing robustly, even as the United States has slowed.
"The market is not at all convinced about decoupling, and I think the market is probably right," Mayer said. "When you look at it more closely, we're suffering from the same issues."
The housing market, after a long boom, is cooling off in several countries, notably Britain, Spain, and Ireland. That will depress the growth rate in those countries, which are among Europe's economic pace-setters.
European banks continue to make unwelcome disclosures about write-downs of mortgage assets, even if the losses are not as dire as those reported by Citigroup or Merrill Lynch. Banks loans across Europe are being constrained, according to a recent survey by the European Central Bank.
Also yesterday, Commerzbank warned it would make additional write-downs in the fourth quarter of 2007. This caught analysts off guard, since Commerzbank has been fairly upbeat about its exposure. "The amounts are not so significant," said Simon Adamson, a banking analyst at CreditSights, an independent research firm in London. "It was more the way the market was caught by surprise."
Shares of Commerzbank fell 6.8 percent, Deutsche Bank fell 6.2 percent, Societe Generale of France 7.7 percent, BNP Paris 8 percent, and the ING Group of the Netherlands was off 8.2 percent.
But the damage extended to the shares of energy companies like BP and Royal Dutch Shell, which dropped on worries that a global economic slowdown would cramp the damage for oil and gas.
"The problem is more deeply rooted in anxiety about the global economy than it is in Germany," said Boris Boehm, an asset manager at Nordinvest in Hamburg. "People are really afraid. But it's a good thing because fear, along with action, gets the market to its proper level quickly."
No matter how many bridges, roads, and power plants China builds, or how many new cars India sells, a downturn in the United States will ripple across Asia's economies, specialists said.
"If the United States consumer quits buying things, it is going to hurt in Asia," said Deborah Schuller, an Asia regional credit officer for Moody's Investors Service. She said most rated corporations there would be able to withstand a nine-month recession in the United States, but if it were to stretch to 12 months or more, there could be some serious problems.
Worries about China are adding to Asia's uneasiness. Its private property market is in the midst of a shakeout, and scores of small developers have gone out of business. Chinese banks were hard hit yesterday, in part because they hold the bulk of Asia's exposure to subprime mortgages.
In Japan, stock markets fell to their lowest levels in more than two years on concerns that an American recession could be accompanied by a home-grown one. Investors were unnerved by data from the Japanese Finance Ministry, which said that growth was slowing in five of the Japan's economic regions. The Japanese economy has been weighed down by stagnant housing investment and a poor employment picture.
In Europe and Asia, there may be further shocks, as banks total the fallout from their investments in the American mortgage market.
"There's an old saying in the market that banks lead us into recession and banks lead us out," Boehm said.
Material from the Associated Press was used in this report.
