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As Wall Street tumbles, the world quakes

Markets from London to Tokyo fell on the news of Lehman Brothers' bankruptcy.

By Mark Rice-OxleyCorrespondent of The Christian Science Monitor / September 17, 2008

OUT OF WORK: An out-of-work employee at Lehman Brothers carried a box from his London office on Monday. The US investment bank declared bankruptcy Monday, sending shock waves through the financial markets.

Sang Tan/AP

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London

Talk of Europe or Asia marching along "decoupled" from the US economy is now gone. No sooner had America's fourth-largest investment bank filed for bankruptcy on Monday than hundreds of suddenly jobless Lehman Brothers staff spilled onto the streets of London.

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It was a tangible sign that global markets and economies are still intimately connected. Banks, insurance companies, pension funds, and mortgage companies from Tokyo to the City are closely tracking the handling of the US financial crisis. While exposure to the root of the problem – toxic securities derived from US subprime home loans – may be lower, financial systems elsewhere are feeling the same squeeze.

"This is a global crisis, not a local crisis," says Jeremy

Batstone-Carr, an analyst at Charles Stanley, a London brokerage firm. He says there is a "distinct possibility" that other institutions in Europe or elsewhere could follow Lehman into bankruptcy.

Christian de Boissieu, deputy president of the Council of Economic Analysis, in Paris, says, "I've never believed in the theory of a 'decoupling' between Europe and the rest of the world. Europe has already been affected by this international financial crisis, along with an energy and food crisis."

That much was clear from financial markets on Tuesday. At one point, the London market fell to its lowest point for three years, the FTSE 100 index dipping below the 5000-point mark, which it first attained in 1997.

Leading indices in both Japan and Hong Kong lost 5 percent. The fear was acute in emerging markets too, with the Moscow leading index down 11 percent Tuesday – mostly due to falling oil prices.

"There's a smell of cordite in the City this morning – you can still smell the gunpowder," says Justin Urquhart Stewart of Seven Investment Management and a prominent commentator on London's financial centre, known as the City. "There is a level of fear about how many other jobs will go. There will be more casualties."

European officials insisted on Tuesday that their institutions are to some extent insulated from the toxic fallout from their US counterparts. Subprime lending is less widespread in Europe. Banks tend to be underpinned by retail businesses instead of operating like the big broker-dealer houses familiar on Wall Street. "Happily," said French Finance Minister Christine Lagarde, "the French banks are affected only to a limited extent."

But the stock markets told a different story. French bank Natixis was down 17 percent at one stage Tuesday, but it wasn't the worst affected. Swiss giant UBS fell 21 percent before rebounding, and Britain's HBOS shares tumbled 22 percent, as traders fretted about whose balance sheet might be the next to fall apart under the strain.

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