New crisis outbreak on sight?

The turmoil of the European banking system and the somber predictions for the local economy have turned BSE indices back on red, combined with a rising liquidity compared to last week’s median. Capital market experts polled by Wall-Street draw a gloomy picture for the stock market in first quarter, with a new crisis outbreak in sight.

Citigroup, RBS and carmakers – on the brink of bankruptcy?

The disarrays of the European banking system reflected in the losses reported by RBS and in the meltdown of Erste Bank quotations, together with the somber predictions on this year’s Romanian economic growth are the primary premises heralding a new phase of financial crisis.

“As things appear now, we should probably take into consideration a new wave of the crisis, like the one in October. Macroeconomic news is negative (the analysts forecast an economic slowdown in USA in second quarter), the instability of the financial system is rising again, with players such as Citigroup and Bank of America reporting dark prospects, and international capital markets being extremely volatile with 4-5%-wide bandwidth fluctuations on a daily basis. Therefore, I wouldn’t be surprised to see broad slumps on short term. Prudence remains the word of the day”, said Razvan Pasol, manager of Intercapital Invest.

Experts say a 30-40% one-month decline is possible, if October’s economic climate would be reinstated.

“However, the market could take the blow of a full-fledged economic crisis, because, compared with October, there were only a few distressed companies in United States and Europe. Meanwhile, the crisis deteriorated many other companies from different fields of expertise”, said Marius Pandele, head of research at Vanguard.

Citigroup and RBS seem to be on the brink of insolvency, while the US Government provides artificial respiration to General Motors, and Chrysler.

“The large amounts that the new administration is willing to spend for rescuing large distressed companies will probably have a positive effect, but it might as well resolutely drive the US economy to collapse. I don’t think the core of the vicious circle that we’re in has been identified yet, enough to take an efficient approach”, said Pandele.

He thinks the cynic side of this situation is that if rescuing the companies in distress would not bring the end of the crisis, their abandonment is not a solution either, as it could set off catastrophic chain reaction.

“The truth is that many companies are the ‘products’ of the economic boom in the past years, and who will have to disappear. The entire industries could melt away, or could be reduced to one or two players in each country. However now, everybody is trying to stay alive but many will realize that the service or products they are selling have no success in the new macroeconomic conditions or they don’t stand a chance for a favorable outcome in a market competition in a dwindling industry”, says the senior analyst at Vanguard.

“The recent bad news on the macroeconomic climate and on the European banking systems may herald a new crisis outbreak”, said Rares Sofariu, research and development manager at KD Capital Management.

“Together with the warning signals sent by the fall of the leu, we are facing some macroeconomic disproportions that will only send investors away. It is hard to say whether these are the signals for a new crisis outbreak, but the general climate is surely not the best for investors”, said Paul Brendea, analyst at Prime Transaction.

Although some analysts expect a recovery, the first quarter of this year will surely not be the best moment for the capital market nor for the economy.

“This quarter is a very difficult one, as all market players will make public their preliminary earning results for 2008, so we will see the first effects of the crisis in terms of financial statement. We’ve seen only negative estimations so far, but now, the crisis will be black on white. Overall, I expect negative evolutions at the stock market, but high volatility and therefore, scattered bullish trading sessions”, added Paul Brendea.

Another aspect is that the stock market continues to be strongly attuned to the foreign markets and influenced by the macro evolutions and government’s performance.

“If there will be no dramatic collapses of US or European giants and no fumbling attempts of the Romanian government, the Bucharest Stock Exchange has the chances to remain steady or even to grow. I believe this variant is less likely to happen as there will be enough factors to drive the stock market to new record lows”, Marius Pandele added.

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