What a Downer

Shares in Asia fell 3 percent on Monday as concerns over the health of the global economy returned to haunt stock markets, sending investors to seek safe haven government bonds.

The yen rose against other currencies as investors shunned riskier bets and unwound currency carry trades, while oil drifted back down below $90 a barrel with traders saying Friday's $1.30 surge might have been overdone after Wall Street ended the week on a down note following two days of sharp gains.

Europe's stock markets were tipped to fall, with financial bookmakers predicting Britain's FTSE 100, Germany's Dax and France's CAC-40 to open around 2 percent lower.

Investors resumed selling after last week's nerve-wracking rollercoaster, which saw global equity markets toppled by growing despair over the U.S. economy earlier in the week and then lifted by a $150 billion stimulus plan agreed by U.S. legislators and the White House.

"The sell-off is hitting all sectors regardless of each company's earnings and outlook," said Kim Joong-hyun, an analyst at Goodmorning Shinhan Securities.

"Although last week's U.S. rate cut has calmed down panic selling, a recovery from the economic woes and the financial sector's debt problems should take a long time."

Seoul's KOSPI index shed almost 4 percent. Foreign investors continued their selling spree for the 18th straight session, dumping 268 billion won ($283 million) in net value on the main board.

Japan's Nikkei benchmark ended down 4 percent. Goldman Sachs said Japan's economy may be already in recession, due partly to weaker exports and sluggish consumption.

Australia's market was shut for a public holiday. Hong Kong's Hang Seng slid 3 percent, while MSCI's index of Asia-Pacific stocks excluding Japan fell 3.4 percent by 0700 GMT, taking year to date losses back above 12 percent.

Shanghai suffered the worst losses, falling 7 percent, dented by heavy snow across central and eastern China, which is seriously disrupting food and energy supplies.

DAVOS DOWNER

Traders were eyeing this week's Federal Reserve meeting, at which the bank is set to cut U.S. interest rates again, having slashed them in an emergency move last week.

World business leaders gathered in Davos for last week's meeting said on Saturday the worst might yet be to come in a financial crisis driven by continuing fears of bank losses and uncertainty over U.S. emergency stimulus measures.

Banks said there were few cures for a financial system faced with hundreds of billions of dollars in investments which have turned bad.

"It will be a while before you see a return of normalcy in banking and markets," Merrill Lynch CEO John Thain said.

French bank Societe Generale's trading scandal remained in focus.

On Sunday, the bank defended its handling of the world's biggest trading scandal, but admitted its risk systems had failed to detect a 50-billion-euro market bet by a lone trader.

Even the IMF Is Panicking

The intensifying credit crunch is so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned at the weekend.

In a dramatic volte face for an international body that as recently as the autumn called for “continued fiscal consolidation” in the US, Dominique Strauss-Kahn, the new IMF head, gave a green light for the proposed US fiscal stimulus package and called for other countries to follow suit.

“I don’t think we would get rid of the crisis with just monetary tools,” he said, adding “a new fiscal policy is probably today an accurate way to answer the crisis”.

Mr Strauss-Kahn’s words rip apart a long-standing global consensus that fiscal retrenchment in the US and Japan is needed to help reduce huge trade imbalances.

It comes as the IMF is due to release new economic forecasts this week which, he said, would show a “serious slowdown and it needs a serious response”.

The US Federal Reserve starts a regular meeting tomorrow and markets expect another half-point cut on top of the 0.75 percentage-point cut last week.

Mr Strauss-Kahn’s dramatic change in stance amazed Larry Summers, the former US Treasury secretary.

He is known for saying that the IMF stands for “It’s Mostly Fiscal” because the organisation has to be tough with countries’ budgetary laxity.

But such is his concern about economic prospects if the US slows and other countries do not pick up the slack in world demand that he supported Mr Strauss-Kahn.

“This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face,” said Mr Summers.

The dark economic mood in Davos was reinforced at the weekend by John Thain, the new chief executive of Merrill Lynch, who predicted the problems in subprime mortgage markets would spread to credit card and consumer loans.

“It will be a while before you see a return to normality in the banking system,” he said.

Thomas Russo, vice-chairman of Lehman Brothers, said: “Absent government intervention, the economic picture is very grey but with government intervention you have a decent chance of stabilising the picture.”

The IMF’s call for countries with strong fiscal positions to loosen their budgets gained approval from Christine Lagarde, the French finance minister, and Palaniappan Chidambaram, the Indian finance minister.

Ms Lagarde suggested Germany would be a prime candidate for fiscal loosening, while Mr Chidambaram said: “India may have some room, if necessary, for some fiscal stimulus.”

But in a rare direct reference to China, he called on Beijing to play its part. “China has huge headroom to stimulate domestic consumption.”

However, it is the global community’s lack of confidence that China will play ball in offsetting a slowing US consumer that makes greater fiscal laxity in many countries appear suddenly appealing.

But amid a sudden enthusiasm for fiscal stimulus packages, some voiced caution.

Professor Ken Rogoff of Harvard University and a former chief economist of the IMF said aggressive fiscal easing generates “more harm than good in most cases”, leading to unsustainable budgetary position that require painful correction in the longer term.