September 17, 2008	Wednesday	Ramazan 16, 1429

LONDON, Sept 16: World stock markets tumbled for a second straight day on Tuesday, with investors unnerved by the risk of a full-blown global financial crisis despite huge cash injections from central banks.

Wall Street continued the rout that began in Asia and spread to European exchanges a day after US investment giant Lehman Brothers stunned the market with a bankruptcy filing.

The Dow Jones Industrial Average slid 0.54 per cent in early trade, largely on fears that insurance giant American International Group may be the next credit crunch victim. AIG shares plummeted as much as 70 per cent at the open.

However, later in the day, Wall Street steadied and managed to move into positive territory on growing speculation the US government would come to AIG’s rescue because the risk of letting it fail would be too great.

“This has the appearance of a cascade or a contagion,” said David Kotok, chief investment officer at Cumberland Advisors.

“Failure of Lehman has created contagion because of counter-party risk that was not contained by the Fed. Failure of AIG will make this much worse.

“Stemming contagion is the job of the central bank ... and it must apply its lender of last resort function,” Kotok said.

At the same time, more positive inflation data encouraged hopes the US Federal Reserve, meeting later in the day, would feel freer to cut interest rates sharply and so give the markets and economy some breathing space.

The Dow Jones Industrial Average was off 0.26 per cent at around 1615 GMT, well off early lows and after a modest foray into positive territory.

In London, the FTSE 100 index closed down 3.43 per cent to 5,025.6 points, having been down more than four per cent at one stage to breach support at 5,000 points, the first time it had fallen below this level since June 9, 2005.

In Paris, the CAC 40 shed 1.96 per cent to 4,087.40 points and in Frankfurt, the DAX was off 1.63 per cent at 5,965.17 points, with both markets down more than three per cent earlier in the day.Elsewhere in Europe, losses were widespread, with some of the smaller markets among the worst hit.

In Russia, the main RTS stock market suspended trading after falling by more than 11.47 per cent, a spokeswoman said, following a move by the number two Micex bourse to do the same.

With nerves jangling, the US Federal Reserve, European Central Bank, Bank of England and Bank of Japan together injected $210 billion into the money markets on Tuesday to boost liquidity.

Investors were meanwhile awaiting a decision by the Fed later in the day in the hope it would announce a sharp cut in interest rates to help calm markets.

“All eyes will be on the Fed to see if they can ease the financial pressures as they announce their rate decision,” said CMC Markets dealer Ian Griffiths.

“Rumours are rife that we could get up to a 75 basis-point cut in interest rates. These rumours have snowballed further after lower oil prices eased inflationary pressures.” Oil prices dropped beneath $90 on Tuesday on prospects that the growing economic gloom would further dampen demand for energy, traders said.

The banks were especially under pressure from the Lehman’s failure and the prospect of more bad news to come, dealers said. They said that if AIG were also to go under, the impact could be even greater given the scale of its investments and borrowings.

British bank HBOS, whose Halifax unit is the biggest mortgage lender in Britain, shed more than 35 per cent of its value at one stage, prompting it to rush out a brief statement to reassure investors.

“HBOS notes the current volatility in bank share prices following developments in the United States,” the bank said.

“HBOS has a strong capital base and continues to fund very satisfactorily.” Switzerland’s biggest bank UBS, among the worst hit by the collapse of the US subprime or higher risk home loan market, suffered too, losing 17 per cent while the overall Swiss market shed nearly three per cent.

UBS shares have lost 73 per cent since the beginning of the year as it has chalked up billions of dollars in losses on its subprime exposure and on Tuesday it again tried to reassure investors it was strong enough to survive.

Dealers said the growing fear is that Lehman’s failure will have a knock-on effect through the entire financial system, with AIG, one of the world’s biggest insurance firms, seen at immediate risk.—AFP