September 7, 2007 / 9:21 AM / 13 years ago

Greenspan cites '87 and '98 market crises

LONDON (Reuters) - Alan Greenspan, once the world’s top central banker, said current credit turmoil reminded him of 1987 and 1998 market crises while policymakers in Sweden and Norway saw it curbing growth in their strong economies.

In this file photo former Chairman of the Federal Reserve Alan Greenspan speaks the Conference on U.S. Capital Market Competitiveness in Washington March 13, 2007. REUTERS/Jim Young

“The behaviour in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock market crash of 1987,” the Wall Street Journal quoted the former U.S. Federal Reserve Chairman as saying in its online edition on Friday.

Hedge fund Long-Term Capital Management controlled $100 billion (49.5 billion pounds) of assets in 1998 but collapsed in the wake of a Russian debt crisis, wreaking havoc in many derivatives markets. Greenspan took over as Fed chief shortly before the Dow Jones share index slumped 23 percent in a day in October 1987.

Sweden’s central bank raised interest rates by a quarter point to 3.75 percent on Friday and stuck to its assessment that more tightening would be needed, but said market unrest was putting some downward pressure on an otherwise buoyant economy.

The Riksbank said troubles stemming from the U.S. home loan market were expected to subdue growth to some degree.

“It is reasonable to assume that this will have some negative consequences for growth abroad and in Sweden. It is as yet too early to determine the extent and duration of these effects,” the central bank said in a statement.

Its counterpart in oil-rich Norway took a similar line, saying lower global growth caused by the liquidity crunch may hit its forecasts for economic development and interest rates.

“Turbulence in international financial markets in recent weeks has heightened the uncertainty concerning developments ahead,” Deputy Norges Bank Governor Jarle Bergo said.

Forecasts for interest rates have altered dramatically since the credit crisis, stemming from mass defaults on U.S. subprime mortgages lent mainly to poor people, prompted banks to clam up on lending as they strive to calculate exposure to the sector.

The European Central Bank, Bank of England and their equivalents in Australia and Canada all left rates on hold this week. Until recently, they had all been expected to tighten policy sooner rather than later.

ECB President Jean-Claude Trichet said on Friday his bank was still poised to act on inflation risks, but the mood of uncertainty meant no change in rates was imminent.

“Given this high level of uncertainty, it is appropriate to gather additional information and to examine new data before drawing further conclusions for monetary policy,” Trichet said in a speech to academics and analysts.

U.S. JOBS DATA A GUIDE FOR FED?

All eyes are now on the Federal Reserve’s September 18 meeting.

Friday’s non-farm payrolls data may go a long way to determining whether the Fed cuts rates, a move analysts say is vital to take the edge off market upheaval.

In a Reuters poll, economists expected companies to have added 110,000 jobs in August, after a 92,000 increase in July.

“A strong payroll gain would focus expectations on a 25 basis points cut on September 18 while a very weak increase would leave open the possibility of a 50 basis points rate cut,” broker Calyon said in a research note.

But Dallas Fed President Richard Fisher said on Thursday it had yet to be determined if there was enough evidence in the U.S. economy of a need to cut rates.

News of fresh subprime damage continued to keep investors on edge.

Data on Thursday showed U.S. homes going into foreclosure hit a record in the second quarter.

Lehman Brothers Holdings Inc LEH.N said it would fire another 850 workers or about 3 percent of its workforce as it scales back mortgage lending operations globally.

And various estimates showed corporate financing markets under strain, with some $300-$500 billion of commercial paper due to be rolled over before the Fed meeting.

Central banks have poured money into money markets over the past month to tame sky-high rates, but with limited success.

Morgan Stanley said the 3-month average spread of LIBOR rates over official rates for the Group of Ten leading economies had climbed to a new high of 64 basis points, from an already wide 42 on August 10.

“Since temporary liquidity measures are not yet working and rate cuts might be slow in coming, we suspect money market pressure will be slow to fade and the impact on the real economy will be more notable than expected,” Morgan Stanley said.

“The question is, where are the surprises?”

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