Gloomy Outlook For Financial World

As the USA got back to work today after the Thanksgiving celebrations, stock brokers there could be forgiven for wanting to run the holiday on for a day or two – or possibly a few weeks.

The holiday has this year been marked by global stock markets suffering yet another day of steep falls over the severity of the credit crisis.

The ongoing turmoil in financial markets has its roots in profligate lending to low-income homebuyers, who have begun defaulting in record numbers.

However, faced with whole housing developments of empty, un-saleable houses - with thousands left homeless - the US mortgage industry is now agreeing to offer special "pay-what-you-can" deals to struggling borrowers, to avoid triggering a wave of repossessions that could precipitate an even more serious housing market crisis.

Four major players, including Countrywide, signed up to a state-wide plan in California.

However, it could be too little, too late, as financial losses from the collapse of the US mortgage market could hit as much as $300bn.

The Organisation for Economic Co-operation and Development (OCED) has warned in its latest report that there could be additional negative consequences too as the ripple effect of this particular financial calamity may be the start of a much more protracted downturn.

Making things worse, the price of oil is looking very likely to hit the once-unimaginable level of $100 a barrel, causing investors to flee equities for government bonds that they hope will better weather the growing economic storm.

The FTSE 100 ended last night down 155.6 points – 2.5% – at 6,070.9, after falls overnight on Asian stock markets.

The Japanese market fell 2.5% to its worst level since July 2006 and the selling continued in the US, with the Dow Jones Industrial Average accelerating lower in the final hour of trading to close at 12,799.04, down 211.1.

Now that lending is under pressure, after years of free-and-easy lending, financial firms are making it harder and costlier to borrow money.

An OCED spokesman said: "As adjustments have often occurred in waves, and as higher funding costs take typically several months to have their full impact on companies or consumers, it may well be that the recent correction is only a precursor of a more protracted downturn."

In London, Alliance & Leicester shares have already hit a seven-year low of 576p, while the buy-to-let lender Paragon plunged an additional 36% as it began work on the emergency fundraising announced earlier in the week.

And in a further sign of stress for the banking system, trading on the $2.8 trillion covered bond market was halted altogether until next Monday after unusually high volatility led the European Covered Bond Council to fear for the financial security of market makers.

(BMcC)