Global stock markets plunged on Thursday as central bank interventions in Europe and Japan failed to soothe investors' concerns over economic growth and the euro zone debt crisis.
The European Central Bank bought government bonds for the first time since March, the Bank of Japan intervened in currency markets to halt the rise of the yen and the Turkish central bank cut rates to an all-time low.
But investors still took fright as most major stock indices entered "correction" territory, having fallen more than 10 per cent this year. The FTSE 100 in London and Germany's Dax-30 both fell 3.4 per cent while the S&P 500 lost 2.4 per cent in morning trading. European bank shares also plummeted with Lloyds TSB down 10 per cent, Barclays 8 per cent and Italy's UniCredit 9 per cent.
"We are seeing a widespread crisis of confidence. Central banks have lost their credibility," said Ed Yardeni, founder of Yardeni Research and a former US Federal Reserve staff member.
The ECB limited its bond purchases to just Irish and Portuguese bonds, disappointing politicians in Rome and Madrid who hoped it could ease the pressure building on Italian and Spanish bonds. Adding to the jitters, the purchases were opposed by Germany's Bundesbank and other members of the ECB's 23-strong governing council.
Both Italian and Spanish borrowing costs rose on the news to within a sliver of their euro-era highs, while those for the US and Germany fell sharply to fresh year-lows of 2.5 and 2.3 per cent respectively.
"They are destroying the euro sovereign bond market, except for the Bund [German debt]," complained an official in Rome.
The ECB also reintroduced emergency measures to boost financial system liquidity by offering banks unlimited six-month loans amid growing signs of distress in funding markets. Jean-Claude Trichet, ECB president, said the steps taken were "right and appropriate" but insisted euro zone governments had to take responsibility for the financial stability of the 17-country region.
The confusion across Europe was amplified by a dispute over whether to expand the size of the euro zone's bailout fund. José Manuel Barroso, the European Commission president, called for a rapid reassessment of the rescue fund including boosting its size from the current €440-billion ($608-billion Canadian).
But he was swiftly rebuffed by German officials who pointed to the recent summit that decided on a second bail-out for Greece. "It is not clear how reopening the debate just two weeks after the summit can lead to calming the markets," said a German finance ministry spokesman.
In Tokyo, the BoJ followed the Swiss central bank's lead from Wednesday , selling yen in a bid to limit the effect of the rising currency on Japan's export-driven recovery. It also increased its ¥40,000-billion asset purchase program by an additional ¥10,000-billion.
The intervention sent the yen lower sharply against the dollar and the euro, but it recouped some of its losses in the afternoon to stand down 2.3 per cent at ¥78.84.
The Turkish central bank 's move was also unexpected given concerns that the economy was already overheating before the rate cut. Turkish shares fell by more than 3 per cent.
The sharp fall in equity markets was accompanied by a flight into safe-haven assets. Gold hit another record of $1,681.67 while 2-year US Treasuries fell 5 basis points to 0.26 per cent, a new all-time low yield.
The flight to safety was exacerbated by a move by Bank of New York to begin charging an additional fee for cash deposits, which pushed more cash into the short-term funding markets, according to traders. An auction of 10-day bills by the US Treasury drew yields of zero per cent, and one-month Treasury bills dropped to negative yields, of -0.0102 per cent, their lowest since January 2010.
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