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EDITIONS
 Thursday, 4 July, 2002, 12:21 GMT 13:21 UK
Q&A: Why are the markets falling?
World stock markets have been in the doldrums for months, with some analysts now forecasting that the downward trend will last for years to come.

BBC News Online looks at the reasons behind the widespread doom and gloom.

What has caused the markets to crash?

The latest falls are a result of scandal and fraud in the US.

WorldCom, the giant US telecoms firm, admitted its chief financial officer had fiddled the books.

That deception led WorldCom to overstate its profits in 2001 and the first three months of 2002 by $3.8bn.

The scale of the scandal, in money terms, is even bigger than the manipulation of accounts carried out at the disgraced energy giant, Enron.

Enron filed for Chapter 11 bankruptcy shortly after the truth about its profitability was discovered.

And it is looking increasingly likely that WorldCom will be forced to throw in the towel as well.

Shareholders in both firms have seen their investments become almost worthless.

But why is this affecting the wider US markets?

Investors are scared that many more firms are using dubious accounting methods in order to artificially boost their bottom line.

If Enron and WorldCom managed to successfully get dodgy accounts past both their auditors and the regulators, many other firms could be doing likewise.

Both firms were large international firms and once seen as a darling of the stockmarkets.

Investors are informed about a company's health by quarterly results and trading updates.

But if these company announcements are no longer to be trusted, investors are left with almost no guidance about a company's profitability and its recipe for future success.

But what's this got to do with European markets?

The US is the biggest economy in the world, and its stockmarkets traditionally guide the direction of markets elsewhere.

Investors fear that European companies are also fudging the accounts, despite the supposedly tighter regulation.

And it seems that even the whiff of dubious accounts is enough to send the share prices in respectable firms sharply lower.

France's media giant, Vivendi Universal, has seen its value more than halved after a French newspaper reported that it tried - but failed - to distort its balance sheet.

And rumours of malpractice at the UK's Vodafone, since dismissed by the telecoms firm as "completely unfounded", were enough to knock 6% of the firm's value on Wednesday.

It seems that investors, who have already been badly burnt, are now unwilling to trust anybody.

Weren't shares already in trouble before the scandals broke?

Yes, the latest plunges are building on a miserable couple of years for the markets.

In early 2000, the once-heady share values of tech, media and telecoms firms collapsed, as investors for the first time started to question the fundamentals of the internet economy.

Then last year, after almost a decade of robust performance, the global economy started to sag, led by the US.

The downturn was accelerated by the 11 September terrorist attacks.

The US slowdown, combined with worse-than-expected performance in Asia and Latin America, led to Europe suffering much more than had been forecast.

The surprisingly rapid economic slowdown undermined the performance of companies across all sectors.

When will things pick up?

A turnaround in stock markets has been forecast for most of the past year, with the economy now showing significant signs of improvement.

But, so far, it has stubbornly refused to materialise.

The sustained downward trend has led some analysts to predict a long-term trend of falling stocks, known as a "bear" market.

All things being equal, a drop in the markets is usually seen as a buying opportunity, as investors spot shares that are undervalued in relation to their fundamental worth.

But no one wants to be the first to decide that shares are being sold too cheaply - most investors are waiting to see how low things can go.

But without buyers, the markets continue to fall. And when the markets continue to fall, no one will buy. Catch-22.


Analysis

IN DEPTH
The Markets: 9:29 UK
FTSE 100 5760.40 -151.7
Dow Jones 11380.99 -119.7
Nasdaq 2243.78 -28.9
FTSE delayed by 15 mins, Dow and Nasdaq by 20 mins
Launch marketwatch
View market data
See also:

14 Mar 01 | Business
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