Global Confidence Declines as Financial-Market Turmoil Worsens

By Ben Sills

Sept. 18 (Bloomberg) -- Confidence in the global economy declined in September as the financial turmoil in the U.S. worsened, a survey of Bloomberg users on five continents showed.

The Bloomberg Professional Global Confidence Index fell to 11.3 from August's 14.1. Confidence among U.S. respondents fell to 10.6 from 18.2, while the Western European measure was at 12.6 after 12.9. A reading below 50 indicates pessimism.

The yearlong credit squeeze has in the past two weeks led to the bankruptcy of Lehman Brothers Holdings Inc. and the takeover of Fannie Mae, Freddie Mac and American International Group Inc. Overnight borrowing costs soared as banks hoarded cash.

``We're heading for a prolonged slowdown almost everywhere starting from the U.S.,'' said Aurelio Maccario, chief euro-region economist of UniCredit Group in Milan, who took part in the survey. ``Given the ongoing financial weakness, the slowdown may gather speed.''

The MSCI index of financial shares has fallen 10 percent since early last week. The Federal Reserve said Sept. 16 it would lend the country's biggest insurer, American International Group Inc., $85 billion to avert the worst financial collapse on record. A day earlier, Lehman Brothers filed for bankruptcy and Merrill Lynch & Co. agreed to be taken over by Bank of America Corp.

About 3,500 Bloomberg users from Tokyo to New York responded between Sept. 8 and Sept. 12 as investors absorbed U.S. Treasury Secretary Henry Paulson's bailout of Fannie Mae and Freddie Mac, which own or guarantee $12 trillion of U.S. mortgages.

``We moved from Fannie and Freddie to Lehman to AIG, and even today, one question is: who is going to be next?'' said Simon Barry, an economist at Ulster Bank in Dublin, another participant.

Credit Losses

Banks worldwide have tallied more than $500 billion in losses and writedowns since credit markets seized up a year ago. Goldman Sachs Group Inc. and Morgan Stanley, the two biggest U.S. securities firms, tumbled the most ever in New York after the AIG rescue failed to ease the credit contraction.

``We haven't experienced anything like this since 1929,'' Former European Central Bank chief economist Otmar Issing, 72, said in a Bloomberg Television interview Sept.16. ``Global growth will slow and is already slowing. But overall, the risks have mostly been confined to a few industrialized countries.''

Bloomberg users increased expectations that lower oil prices will allow central bankers to pare interest rates as the economic outlook deteriorates. In Germany, the measure for central bank- rate expectations fell to 34.1 from 42.7, signaling respondents in Europe's biggest economy now anticipate that the European Central Bank may cut its key rate in the coming six months. The gauges also declined in the U.S., Japan, and the rest of the euro region.

Timing of Recovery

The price of oil fell by a third since touching a record $147.27 in July and traded at $92.70 a barrel in New York today.

``For global business confidence to improve two things are needed: the U.S. housing market to bottom out and a sign that the financial turmoil is nearing an end,'' said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. ``That won't be until around the second quarter in 2009.''

The cost of borrowing in dollars for three months jumped the most in nine years yesterday as banks hoarded cash amid speculation more financial institutions will fail. The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said.

The euro region and the Japanese economies shrank in the second quarter, while the European Union says the U.K. will suffer a recession in the second half of the year. The U.S. unemployment rate jumped to 6.1 percent in August, the highest in five years.

Respondents in Japan were the most pessimistic about the global outlook. Participants in Spain, which the EU says faces its first recession in 15 years, were the gloomiest about their economy, with a reading of 4.1, followed by the U.K. Participants in Brazil remained the most optimistic about their economy, at 58.2.

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net