Worldwide nosedive in shares

THE WORLD'S financial markets plunged into chaos yesterday, just two days after central bankers meeting in Hong Kong had prematurely toasted the end of the global economic crisis that started in Asia 18 months ago.

Two of the biggest emerging economies, Brazil and China, separately moved closer to the verge of financial meltdown, putting at risk billions of dollars they owe to Western banks and investors. Share prices dived in London, New York and other main stock markets.

President Bill Clinton was briefed on the financial emergency by Robert Rubin, the US Treasury Secretary. Larry Summers, his deputy and the architect of the recent Brazilian and Asian financial rescues, cancelled all his appointments to deal with the crisis.

Brazil abandoned the defence of its currency yesterday, causing its central bank governor to resign, in breach of the terms of the $41.5bn (pounds 26bn) international bailout agreed with the International Monetary Fund before Christmas. The decision to devalue came in response to the massive flight of capital from Brazil, amounting to some $8bn since the beginning of last month, and well over $1bn a day in the past two days.

The move will cause heated recriminations among ministers from the leading G7 economies. With finance ministers and central bankers due to meet in Bonn next month, and deputy finance ministers meeting this weekend, the global crisis has returned to haunt them just as they had begun to hope that their own economies would escape unscathed.

For the US administration, in particular, the economic outlook - and voter approval of Mr Clinton - depends on a buoyant stock market keeping consumers spending and businesses hiring staff. "We have a strong interest in seeing Brazil, with whom we have worked on so many important things around the world, carry forward with its economic reform plan and succeed," the President said yesterday.

The turmoil in Brazil raised fears in the US that a fresh round of market nerves could unsettle the eight-year US economic boom, the second longest in history. Stocks plunged last year after capital flight in Asia and Russia threatened Latin America, but recovered as the IMF and the US government injected new cash. The Dow Jones Industrial Average fell 250 points yesterday, but recovered to stand about 125 points down.

Brazil is the eighth largest economy in the world, and a key trading partner for the US. American banks have about $25bn of exposure, mainly in short-term trade finance. But if the crisis spills over to Mexico, it would have a far more direct impact on the US financial system and economy.

US manufacturing industry has already been hit by the flagging growth in the rest of the world, which has pushed the trade deficit to record levels. But the most direct impact of a Brazilian crisis could be through the stock market. Having paused halfway through last year, it has been in the throes of a fresh surge in the past week. Even a modest-sized decline would hit investors and could spark a slowdown. The US has little room for reducing interest rates, as it did last year.

But concerns about Brazil yesterday were dwarfed by the fear that China, the giant among emerging economies, might default on some of its debts or make Western investments worth far less by devaluing its currency. Yesterday, Guangdong Enterprises, a government holding company for businesses in the province neighbouring Hong Kong, revealed that it had debts amounting to almost $3bn. Investors had been willing to overlook the weak financial position of these businesses because they assumed the state would guarantee repayments. Now they are being asked to delay calling in loans and to invest new capital.