It came amid a warning from the World Bank of a 'danger zone' and last night's backfired attempt by the Fed in the U.S. to prop up confidence.
All leading global stock markets indices plummeted with the FTSE 100 down 4.7 per cent - a colossal slump of 246.80 points to 5,041.61, its biggest points fall since November 2008.
The fresh sell-off was primarily sparked by America's announcement last night of a £250billion rescue operation to prop up its feeble economy.
Taking stock: A Barclays Capital trader holds his head while working on the trading floor at the New York Stock Exchange, which has seen huge amounts wiped off the value of firms.
The Dow Jones slumped on opening and was down 3.4 per cent by the time of the close in Europe. It adds to a fall of 2.5 per cent on Wall Street yesterday. Germany's DAX closed down 5 per cent.
Fresh evidence also emerged overnight of a slowdown in China and a warning from the World Bank further added to the panic in equity markets.
President Robert Zoellick said the world was 'in a danger zone'.
'Europe, Japan, and the United States must act to address their big economic problems before they become bigger problems for the rest of the world,' he said at the annual meeting of the World Bank and International Monetary Fund. 'Not to do so is irresponsible.'
'Some developed country officials sound like their woes are just their business. But my confidence in that belief is being eroded daily by the steady drip of difficult economic news. The world is in a danger zone.'
Banks were among the biggest losers, now the norm in sell-offs, with Lloyds Banking Group shares down more than 10 per cent at 32.51p and Barclays off 9.4 per cent at 138.85p.
Miners also fell victim, due to the expected slump in demand for commodities, with Vedanta Resources shares plunging 13.3 per cent and Antofagasta down 12.7 per cent.
The huge threat facing the British and global financial system was laid bare last night as the U.S. took unprecedented emergency steps to aid the world’s largest economy.
Frightening evidence that the crisis in euroland is spinning out of control also emerged as the International Monetary Fund revealed that a £263billion black hole has opened up in its banks.
The turmoil on both sides of the Atlantic will spark fears that the world is heading for its worst economic crisis since the collapse of Lehman Brothers three years ago.
The Federal Reserve, America’s central bank, launched a £250billion operation to lower borrowing costs for businesses and for consumers in the U.S., selling its shorter-term securities to buy longer-term holdings.
Its move came amid escalating fears over the health of its banking system.
A trio of the country’s biggest banks – Citigroup, Bank of America and Wells Fargo – had their credit ratings downgraded by leading rating agency Moody’s. The UK is in danger of being caught in a vice caused by the problems on both sides of the Atlantic as the eurozone and the U.S. are our biggest trading partners.
The Fed is already engaged in enormous efforts to stimulate U.S. growth and has held short-term interest rates near zero since December 2008.
04.35pm, 22 Sep 2011 FTSE 100 (UKX)
5,041.61p -246.80p -4.67%
1 day 5 day 1 mth 3 mth 6 mth 1 yr
Prices delayed by 15 minutes.
It is under pressure to revive an economy that has limped along for more than two years since the recession officially ended.
As well as the rescue – the first of its type for 50 years when a much smaller exercise was undertaken – the Fed issued a grave warning about the ‘significant downward pressure on global markets’.
Fury: People from all over the U.S. have gathered on Wall Street in New York to voice their frustration with the economy and banks.
It said this has been caused by the failure of the euro area politicians to take tough decisions to resolve the turmoil in the single currency area.
The Washington-based IMF echoed the Fed’s swingeing cricitism of Europe’s leaders for failing to rescue their banks and restore stability.
It said that if they do not do so quickly, lending across the region would dry up, accelerating the downward spiral which has brought growth to a shuddering and dangerous halt.
The IMF’s top financial stability official, Jose Vinals, said: ‘Sovereign [debt] risks have spilled over to the region’s banking system.
‘This has put funding strains on many banks in the euro area and has depressed their value.’ Since the euroland crisis flared up in Greece last year an astonishing 40 per cent has been wiped off the market value of Europe’s banks.
Mr Vinals called for an immediate bail-out of the banks across Europe even if this meant nationalising them.
Eurozone: Protesters hurl rocks at police during a violent demonstration against austerity in Greece, a financial crisis which continues to depress markets.
‘The worst thing that you can have are banks that cannot get funding,’ he warned.
Mr Vinals blamed inaction on ‘weak politics’. Failure of leadership on both sides of the Atlantic has led financial markets ‘to question their resolve’.
The IMF estimated the direct exposure of the banks to the struggling PIIGS – Portugal, Italy, Ireland, Greece and Spain – to be 200billion euros (£175billion). But when the banks’ lending to each other is taken into account the number climbs to 300billion euros (£263billion).
Britain moved to bail out its banks three years ago in the wake of the Lehman collapse when the government took big stakes in Royal Bank of Scotland and Lloyds Banking Group and effectively nationalised Bradford & Bingley.
The IMF accused European leaders – German chancellor Angela Merkel and French president Nicholas Sarkozy – of failing to address problems full on.
The euro area needed to act ‘decisively and expeditiously’ to resolve the sovereign risks to the world economy and the spill over to the weak banks.
If there is to be a recovery in Europe then the ailing banks ‘need to have sufficient muscle to support economic recovery through lending’, the IMF said.
A leading IMF official acknowledged that in Britain the Project Merlin agreement between the banks and the Government meant that lending was taking place.
But the official made it clear that the targets need to be revisited on a regular basis and that lending to small and medium sized enterprises needs attention.
RIGHTMINDS
RUTH SUNDERLAND: 'The financial crisis that had its genesis in the banking system was always going to spread to sovereign nations. Now we are indeed entering a new and dangerous phase, and the really worrying thing is the utter and abject lack of convincing leadership, the absence of any big world figure with a convincing vision of how to get out of this awful mess, and what the world might look like when we eventually do. Share markets have been incredibly febrile so the FTSE 100 and other indexes are quite likely to bounce back. But this is a deep and real crisis. The eurozone is facing an existential crisis and the US as the world's dominant economy, is staggering under a mountain of debt.'
Meanwhile, disappointing news about China's economic prospects emerged overnight.
A key survey by HSBC revealed factory output in China fell for a third month running in September, sparking fears of a slowdown in the world's second biggest economy.
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