Stock Markets Around World Take a Beating

European stocks continued to sink Monday, flirting with their lowest values in recent years and falling through important psychological levels, intensifying the atmosphere of gloom darkening the world economic outlook.

From Stockholm’s loss of more than 30% year to date to Milan’s lowest close in two years, the Continent’s markets have taken a beating--in many cases worse than the carnage American investors have experienced on Wall Street. Britain’s FTSE-100 index briefly fell below 5,000 for the first time in three years.

Nor has the damage been limited to Europe. Markets from Japan to Brazil also were hit Monday in a potent demonstration of the interdependence of financial centers. As the world economy ebbs, stockholders everywhere face the danger of deeper financial damage.

Analysts are unsure whether global markets are reading economic conditions correctly or are playing follow-the-leader across time zones. Indeed, European markets gyrated Monday, falling sharply and then recovering along with U.S. markets.

Although key U.S. stock indexes stabilized Monday after last week’s blood bath, stockholders everywhere have seen wealth evaporate for months. The losses threaten to cause additional damage to U.S. and foreign economies by curbing consumer and corporate spending.

Continuing bad news about the U.S. economy means fewer sales for European manufacturers, layoffs and profit warnings. But analysts also blame the European Central Bank for refusing to lower interest rates to spur spending and say shareholders are unwilling to trust signs that real economic growth will reach 2% next year, if not sooner.

The main reason share values, especially in technology and telecommunications, are dropping is to correct previous overvaluations, said Thomas Mayer, senior economist at Goldman, Sachs & Co. in Frankfurt, Germany. He said in both Europe and the United States “prices went way above what could be justified by fundamentals.”

Germany’s Deutsche Telekom, widely held and long considered a rock-solid “widows’ and orphans’ stock,” plunged below its initial public offering price for the first time in five years.

What now seems like panic selling is the price to be paid, he said, for ignoring those realities.

“We are still in a shakeout phase, and it won’t necessarily stop when markets reach correct valuations,” Mayer said. “In the same way that you can have irrational exuberance, you can also have irrational depression.”

What is needed to boost confidence is a substantial reduction in interest rates and a more aggressive central bank, analysts say. Although the U.S. Federal Reserve has lowered rates seven times this year, the ECB has made only two minimal adjustments.

“If the ECB doesn’t react and the Fed does, the U.S. takes the lead in our financial markets and all signals originate in the United States, not in Europe,” said Gustav Horn, head of the German Institute for Economic Research in Berlin. Friday’s market turmoil, when the DAX fell more than 3% after disappointing U.S. employment figures, was just the latest example, Horn said. The German index dropped an additional 1.15% on Monday.

The U.S. Dow Jones industrial average slipped 0.34 point to 9,605.51 on Monday, after tumbling 234.99 points Friday in the wake of the same unemployment report.

Although he sees a danger of mounting panic among European shareholders, Horn said the consequences are far less severe than in the United States because stock value fluctuations have less influence on consumption in Europe.

Many Americans depend largely on their investments for their retirement, while European pension systems are more generous. That means small investors tend to play with expendable resources, not their future grocery money.

Still, plummeting share prices are spooking government and industry leaders as well as investors. In Italy, where the Milan stock market posted a new two-year low Monday, Prime Minister Silvio Berlusconi urged citizens to “stay calm and not confuse the ups and downs of the stock market with the solidity of our companies.”

Italians, like most Europeans, are relative newcomers to stock ownership and have yet to develop the intestinal fortitude to stay in a down market, said Giorgio Di Giorgio, professor of monetary economics at Luiss University in Rome. “It takes some time to gain a financial culture that is more ready to invest in long-term securities,” he said.

British economists had thought their country could weather the U.S. downturn because it has enjoyed steady retail sales growth and a jobless rate now at a 26-year low. But they, too, have begun to wonder.

Although the FTSE recovered to close at 5,033.7, down less than 1%, it has lost 19% of its value this year.

“Gloom spreads in an epidemic way once it starts in the market,” said Roger Alford, a senior research associate at the London School of Economics.

French observers said falling share values are unjustified.

“Markets absolutely do not reflect the economic situation. Markets are overreacting because of a lack of confidence, and it’s been like that for almost a year now,” said Marc Touati, financial analyst at Natexis Banques in Paris. The blue-chip CAC-40 index has shed 25% of its value this year despite strong French consumption and production, he said. It fell 0.7% on Monday.

Chief among stocks getting hit is Deutsche Telekom, which has lost 80% of its value over the last few months. On Monday, it crashed through the psychological barrier of its 1996 IPO price of 14.57 euros. The stock traded above 100 euros last year.

Germans’ innate aversion to debt and risk may help them through these hard times. Most entered the market mindful of advice to stay in for the long term, which means they probably will ride out the turbulence rather than panic and sell at historic lows, said Ruediger von Rosen, head of the German Shareholders Institute in Frankfurt.

“But people are losing confidence in the markets, and the real litmus test will come if stock prices rise again and people decide not to invest in them but to stick to more boring fixed-income results,” he said, such as passbook savings and low-interest money market accounts.

Rosen sees investor confidence also hit by shortcomings in market regulation that have allowed a few companies to misrepresent their prospects to shareholders. When actual earnings proved dramatically below company forecasts, stock prices collapsed and misled shareholders had no legal recourse.

“There’s not much we can do now to advise investors because it’s far too late,” said Reinhild Keitel of the Society for the Protection of Small Investors in Esslingen, Germany. “We are expecting an improvement. But it would be an illusion for anyone to expect values to reach levels like 80 or 100 euros for Deutsche Telekom again.”

Although Germany is only one of 12 countries linked by the euro common currency, it accounts for a third of the region’s economic activity and its setbacks spill over to neighbors and trading partners.

“What the markets are waiting for is stability in earnings trends,” said Herbert Stuerm of DG Bank in Frankfurt, who sees hope in a few recent indexes but no clear trend.

Times staff writer Marjorie Miller in London and special correspondents Maria De Cristofaro in Rome, Reane Oppl in Bonn and Achrene Sicakyuz in Paris contributed to this report.