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Last Updated: Friday, 10 August 2007, 02:08 GMT 03:08 UK
Mortgage concerns hit US markets
Trader on the New York Stock Exchange
Traders are trying to work out if the current problems will continue
US shares have tumbled amid fears that problems in the mortgage market may prompt a global credit crunch.

The main Dow Jones index fell 387.18 points, or 2.8%, to 13,270.68. The S&P shed 3% and the Nasdaq lost 2.2%.

European indexes had slumped earlier after BNP Paribas froze three funds saying the market for some of the assets they contained had disappeared.

The European Central Bank and Japan have both pumped money into the banking market to boost liquidity.

The Japanese central bank injected 1 trillion yen (US$8.4bn, 4.2bn) into markets in an effort to stop further falls on Friday.

There also were reports that the US Federal Reserve was doing something similar to ensure that there was enough cash available for banks to use.

Analysts said that the markets would remain volatile in the near future.

"Markets are taking this latest news seriously with the risk appetite on the back foot," said David Corbell, analyst at IFR Markets.

Spreading out

The latest trigger for the slump was the announcement by BNP Paribas that it was suspending the three investment funds worth 2bn euros (1.35bn) because of problems with the US sub-prime mortgage sector.

Sub-prime lenders offer loans to consumers with a poor credit history.

You're looking at the foundation of a marketplace that has imploded somewhat
Steve Goldman, Weeden & Co

In recent months, the number of loan defaults has increased because of higher interest rates, raising concerns that the wobble in the housing market will affect other parts of the economy and then start hurting other nations.

The worry is that should banks make losses then it would hurt their earnings and their profitability making them less willing to fund the takeovers and buyouts that have underpinned much of the stock markets' recent gains.

The recent collapse of American Home Mortgage, the 10th largest lender in the US, has intensified those concerns.

"You're looking at the foundation of a marketplace that has imploded somewhat," said Steve Goldman, an analyst at Weeden & Co.

Tighter times

At the same time, banks have suddenly started charging significantly more for the money they lend to each other, signalling that they are looking to limit their risks, analysts said.

In response, the European Central Bank (ECB) said on Thursday that it had pumped 95bn euros into the eurozone banking market to allay fears about a credit crunch and lack of liquidity.

The conditions for the marketplace working through these issues are good
President George W Bush

The move represented the ECB's single largest intervention in the banking sector since the immediate aftermath of the 9/11 attacks on the US in 2001.

Calling it a "fine-tuning operation", the ECB made the money in the form of loans, an offer taken up by 49 banks and other financial institutions.

In the US, the Federal Reserve, also was reported to have taken similar action, pumping about $24bn (12bn) into the US banking system.

Analysts said that a credit crunch - when it becomes harder for banks, companies and consumers to get access to loans and cash to run their operations - was a serious occurrence that could lead to a recession.

Soothing words?

The declines in the US markets came despite attempts by President George W Bush to calm market fears.

Speaking after a meeting with his top economic advisers, President Bush acknowledged there had been "disquiet" on Wall Street over the housing slump.

But President Bush said he believed the markets were set for a "soft landing".

President Bush said he expected the markets to focus increasingly on the underlying health of the global economy and robust US prospects.

"The underpinnings of our economy are strong," he said, adding that second-quarter growth had been strong, while both inflation and unemployment remained low.

"So the conditions for the marketplace working through these issues are good. My hope is that the market, if it functions normally, will be able to yield a soft landing."

Concerns in the US spread around the globe

US lender on brink of bankruptcy
06 Aug 07 |  Business
Big US slump ends volatile week
03 Aug 07 |  Business
Volatility sweeps global markets
27 Jul 07 |  Business

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