Markets Fear Nationalization of Banks and Strengthening Recession

The increase in the U.S. government’s ownership stake in Citigroup, which investors fear could be the beginning of the nationalization of several large banks, along with the largest decline in the U.S. economy since 1982, caused a drop in stock prices on global exchanges last week.

On Wall Street last week, the Dow Jones index plummeted 4 percent to 7,062 points, the lowest level since May 1997. The S&P 500 index fell 4.5 percent to 735 points, the lowest level since December 1996. The Nasdaq index lost 4.4 percent, diving to 1,377 points.

The banking sector was under the greatest pressure last week on Wall Street as the U.S. government, seeking to clean up the bank’s balance sheets from bad debts, decided to increase its ownership stake in Citigroup to 36 percent. This will be achieved by converting its preferred shares, worth $25 billion, into common stock, and this transaction does not foresee injecting additional budget funds into the bank.

"Investors fear that Citi is not the last bank in which the government will take a large stake, and when the state becomes the owner of 30 to 40 percent of a bank’s shares, it can be considered a form of nationalization," says William Lefkowitz, a strategist at the brokerage firm vFinance Investments. As a result, on Friday alone, the price of Citigroup shares plummeted 39 percent, while the KBW bank sector index fell 8.7 percent.

Last week, the pharmaceutical sector also came under strong pressure after U.S. President Barack Obama presented a budget proposal for 2010, worth $3.550 trillion, which includes cuts to Medicare and Medicaid health insurance program expenditures. The Obama administration is trying to expand citizens’ rights to health insurance while also reducing the costs of the entire healthcare system by allowing citizens to purchase cheaper, generic drugs, which could negatively impact pharmaceutical companies that produce original drugs. For example, the price of Merck shares fell 6.7 percent just on Thursday, while the S&P health companies index lost 5.1 percent.

"It is evident that the government is trying to expand health insurance rights to all citizens, but to do so, it must reduce expenditures for some healthcare agencies," explains Peter Jankovskis, director at OakBrook Investments.

The market was also negatively affected by the data that in the last quarter of last year, the U.S. gross domestic product fell by 6.2 percent, marking its largest decline since 1982, when a recession lasted 16 months in the U.S. All other macroeconomic data indicate that the recession in the U.S. is strengthening. Thus, in mid-February, the number of Americans receiving unemployment assistance reached a record 5.1 million. In January, sales of both new and existing homes fell sharply, with prices also declining significantly, indicating that the housing market, where the crisis began nearly two years ago, is still not stabilizing.

"These data show a very depressing situation in the economy at the end of last year, and foreshadow poor economic performance in the first part of this year," says Bill Cheney, an economist at John Hancock Financial.

Throughout February, the Dow Jones index fell by 11.7 percent, and the S&P by 11 percent, marking their largest decline in February recorded since the Great Depression of 1933. Since the beginning of the year, the S&P index has fallen by 18.6 percent, its largest decline ever recorded at the start of the year.

European stock prices also sharply fell last week. The London FTSE index plummeted 1.5 percent to 3,830 points, bringing its loss in February to 7.7 percent. The DAX, the Frankfurt Stock Exchange index, fell by 4.3 percent last week to 3,843 points. On the Tokyo Stock Exchange, the Nikkei index rose by 2 percent last week to 7,568 points. (Hina)