Tension spreads around the globe
SHANGHAI — Du Xiufeng, a small textile producer in China's industrial belt near Shanghai, is about as far from the drama on Wall Street as you can get. Yet neither he nor countless businesses in China and around the globe can escape the fallout from America's financial meltdown.
"The global market is already bad enough, and because of this our business will probably be even worse next year," said the wiry 34-year-old as he reflected Tuesday on the news of Lehman Bros. Holdings Inc.'s bankruptcy filing and Merrill Lynch & Co.'s abrupt sale to Bank of America Corp. Du's Christmas exports to the U.S. are down 40% this year, and now he figures Valentine's Day is lost too. "This recession is really global. Everything is connected."
As U.S. officials engineered a bailout of insurance giant American International Group Inc. in New York on Tuesday, Lehman workers in London carted boxes from their offices and worried about joining the unemployment rolls. Bankers and accountants in Asia were tallying their exposure to American assets -- South Korean financial firms had more than $700 million in investments each in securities linked to Merrill and Lehman.
And investors in Kuwait watched as oil futures kept falling amid expectations of depressed demand for many commodities, led by the United States. On Tuesday, crude was down more than $4.50 in New York, closing at $91.15 a barrel -- the lowest since February.
"We're talking about a global economy that has been driven by extreme excesses created by the housing market in the U.S.," said Kirby Daley, a strategist in Hong Kong for brokerage Newedge Group. "It was like a drug. But the drug is now gone, and there will be an adjustment."
One of the biggest adjustments will be the re-pricing of assets. When it filed for bankruptcy protection, Lehman said it had more than $639 billion in assets and debt of $613 billion. But if those assets are dumped in a liquidation, that could force other firms to mark down their assets, imperiling their capital base and financial stability.
In that case, how many institutions would fail? asked Andy Xie, an independent economist in Shanghai.
"The re-pricing means a big reduction in credit to U.S. households," said Xie, former chief Asia economist for Morgan Stanley. "The U.S. economy could go through what happened in Asia one decade ago: 4% to 5% contraction" in gross domestic product.
