WASHINGTON — Stock markets around the world plummeted Monday as a financial crisis that began in the market for U.S. home mortgages spread over almost all corners of the global economy.
U.S. markets were closed for the Martin Luther King Jr. Day holiday, but all of the world’s other major economies experienced a sell-off. Stock prices fell 7 percent in France and Germany, 5 percent in China and Great Britain, and 4 percent in Japan. Stocks lost value in 42 of the 43 nations with widely followed markets; the only exception was Sri Lanka.
“It was all about blood on the wall,” said Georges Ugeux, chairman of Galileo Global Advisors, who was visiting the Indian stock exchange, which fell 7.4 percent (the equivalent of a 900-point drop in the Dow Jones industrial average). “For them, this is a black Monday.”
Behind it all: Investors worldwide grew fearful that problems from massive losses on loans made to U.S. home buyers will cascade through the world financial system. For example, the Bank of China is now forecast to record a multibillion-dollar loss on U.S. mortgage investments.
And companies that insure bonds are incurring such massive losses on exotic securities based on mortgages that one is in receivership and others have had their credit ratings cut. That could cause financial institutions worldwide to mark down the value of a wide range of assets guaranteed by these insurance companies.
Add to that the slowing U.S. economy, and it was too much for investors worldwide.
“We’re in a global economy,” said Randy Bateman, chief investment officer of Huntington Asset Advisors. “This is just the result of a perfect storm of problems that have surfaced here in the last two weeks that have manifested in the stock markets — all of them.”
While the European stock markets have avoided most of the volatility of the U.S. stock exchanges in recent weeks, European Union officials voiced anxiety today that the U.S. economic slowdown may begin having a stronger impact on Europe.
“We are all concerned,” said Finance Minister Andrej Bajuk of Slovenia, whose country holds the EU’s rotating presidency. “We are following the events on a daily basis. We hope things will not be as bad as they may look.”
Other European officials said they hope the strong European economy — driven by declining unemployment and a strong euro — will outweigh the emotional response to the economic slowdown in the United States.
“It seems that the markets are considering the possibility of a more pronounced slowdown, even a recession in the U.S.,” EU Monetary Affairs Commissioner Joaquin Almunia told reporters Monday. “I hope they will pay attention also to the real information about the economy, in particular in Europe. Because, at least in Europe, the economic fundamentals of our economies are sound.”
Almunia also said that European markets are becoming more independent of the U.S. economy, which he hoped will insulate them from continuing downturns in the U.S. market. With the dollar at all-time lows against the euro, in the past year European markets increasingly have been turning to China, Russia and oil-wealthy Gulf nations to compensate for some of the business they have lost from the United States.
Champagne producers, for example, are more than making up for lost sales to the United States with increasing markets in Russia and other countries with burgeoning wealth and a growing consumer class.
Though some European financial institutions with U.S. investments have suffered from the subprime mortgage crisis, most European banks have not been affected. Mortgage requirements are much more stringent in most European countries, and housing markets, while cooling slightly, have not suffered the decline in sales seen in the United States.
Even so, consumer confidence has been slipping in many European countries as inflation has begun making a comeback in recent months. Holiday retail sales were down in France and other countries, in part because consumers fear inflation in the prices of many basic commodities such as milk and bread.
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