Larry Summers, who served as Secretary to the Treasury between 1999 and 2001, admitted that the market was on course for further turmoil. The announcement came after the near breakdown of the $2,200 billion commercial paper market in the US.
The announcement also followed the ‘token sum’ sale of state bank SachsenLB in Germany. The bank had accumulated $80 billion of exposure to risky assets which it had obtained through Irish funds to keep off balance sheets. The bank, which was believed to have been the biggest victim of the worldwide credit crunch, was sold for a token $300 million to its rival Landesbank Baden-Wurttemberg and highlighted the extent of the crunch currently being felt in the US and Germany.
Summers said: “It would be far too premature to judge this crisis over. I would say the risks of recession are now greater than they’ve been any time since the period in the aftermath of 9/11.”
Georg Milbradt, Prime Minister of Saxony, the regional government in charge of SachsenLB, admitted that the sale was the only viable option. He said: “Given the market turbulence and the pressures on the bank, it could not have gone on without a partner.”
Speaking to the BBC, Shoji Yoshikoshi, senior investment strategist at Mitsubishi Capital UFJ Securities, added: “Everyone is scared. It’s like walking in the dark because we have yet to get the full picture of the non-conforming loan problems.”
