Sell-off in global markets raises ghost of '87 crash

October 06, 1992|By Knight-Ridder News Service

LONDON -- Yesterday's sudden, sharp sell-off in global stock markets has left jittery investors pondering the possibility of a crash like the one that sent share values plummeting worldwide in 1987.

Some analysts see strong similarities between conditions now and five years ago. The more pessimistic among them believe yesterday's situation has the makings of an even worse scenario.

As in 1987, high German interest rates have produced extreme turbulence in currency and credit markets, leading to public policy disputes between Germany and the leaders of other major industrial nations.

But in contrast to 1987, events of the past several weeks have been set against the backdrop of a sharp economic slowdown in the major industrial countries. And recent events are arguably far more serious, having already left the European Monetary System in tatters and plunged the European Currency's union project into disarray.

All of this, moreover, comes amid electoral uncertainty in the United States and economic policy uncertainty in Britain -- where financial markets are groping for some glimmer of insight into the government's new policy following sterling's sudden departure from the ERM on Sept. 16.

Now, the chaos in credit and currency markets has finally spilled over into the world's stock exchanges.

"Objectively, this is a much worse market context than the crash of 1987. We have a latent unresolved currency crisis and the beginning of a stock market crisis. The two crises are linked, and the common thread is the Bundesbank's monetary policy," said economist Christopher Potts.

"The markets are putting tremendous pressure on the Bundesbank. It cannot keep interest rates at current levels much longer," Mr. Potts added.

European stock markets opened sharply lower yesterday, particularly in London, where the Financial Times-Stock Exchange100-share index fell as much as 70 points in early trading on concerns about the lack of a clearly articulated British government policy following last month's ERM debacle.

Then, when the Dow industrials opened sharply lower, the FTSE-100 plunged, to end the day 103.4 points lower, at 2,446.3. The Dow quickly extended its losses, too, falling as much as 104 points, to 3,096, before recovering in afternoon trading to close only 21.61 points lower, at 3,179.00.

The French CAC-40 shares index followed suit, diving 105 points, to its lowest close in Paris since Feb. 7, 1991, which coincided with the outbreak of the Persian Gulf war. The 105-point plunge was the largest intra-day drop since Aug. 19, 1991, the date of the aborted coup against then-Soviet President Mikhail S. Gorbachev.

In Frankfurt, shares also plummeted. German dealers blamed tensions in the EMS and the Bundesbank's high rate policy for pushing the DAX down to new depths.

"In Germany, we are already in a crash situation because of turbulence in the EMS," said Reinhard Voss of Berliner Bank. He noted thatthe German mark's strength against nearly all other currencies was damaging German exporters.

Nevertheless, German dealers don't believe the sharp drops in Frankfurt and other European shares will lead to a crash of the magnitude of 1987. As Helmut Kuehlein, an economist at CSFB-Effectenbank noted, for example, the DAX has fallen about 350 points in the three months since July 1, not all at once as in 1987.

Analysts in London and New York are more sanguine. They note that while the Bundesbank's tight money policy is again stirring up a storm as in 1987, the U.S. Federal Reserve, unlike 1987, has been cutting interest rates progressively for several months now.

The optimists, particularly in New York, also believe stock traders and regulators have both learned their lessons from 1987.

Some, particularly in London, also argue that shares are not as overvalued as they were in 1987.

"In 1987, the markets were clearly overvalued; the valuation criteria had become clearly overstretched and had reached unsustainable levels," Corey Miller, an equities strategist at Societe General Strauss Turnbull, said.

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