The emergence of the economic crisis in 2008 led to massive price drops in capital markets. Many stock exchanges recorded the worst price corrections seen since the Second World War.
Capital market performance had already been negatively impacted at the beginning of the year by the real estate crisis that broke out in the U.S. in the middle of 2007. Large write-downs in the annual reports published at the beginning of 2008 caused prices to fall dramatically. The many monetary policy measures implemented by the U.S. Federal Reserve in the hopes of stabilising capital market prices, such as sizeable interest rate reductions and increases in liquidity, only brought temporary calm to the situation. A speculative bubble in commodity markets that was causing high inflation rates worldwide prevented further price support measures by international central banks. As a result, another price correction occurred during the summer months.
In order to prevent an even greater downturn in real estate prices in the U.S., the two largest real estate financing institutions, the government-sponsored enterprises Fannie Mae and Freddie Mac, continued to pursue an expansionary business model at the behest of the U.S. government. However, these two institutions were placed under government conservatorship at the beginning of September after high write-downs had reduced their capital to an insufficient level. In addition, the U.S. investment bank Lehman Brothers filed for chapter 11 bankruptcy protection in mid-September after negotiations to raise additional equity collapsed and, contrary to market expectations, the government did not provide any funding for the company.
This triggered a massive crisis of confidence among banks. The interbank market that banks use to provide each other with short-term liquidity collapsed, since after this time it could no longer be assumed that financially distressed banks would be rescued. The capital markets reacted very negatively to this development. Within a period of only two months, equities lost around 40% of their value worldwide, as measured by the MSCI World Index.
In order to ease the tension and stem the developing global economic crisis, policymakers were impelled to prepare bank rescue packages. These provided for both equity infusions as well as government guarantees for bank refinancing, and prevented further acceleration of the financial crisis. Alarming economic data received since that time led policymakers to announce support packages. In addition, due to strong declines in commodity prices that led to a reduction in inflation rates, central banks were also able to implement drastic interest rate reductions. The result was a slight recovery of prices in the final weeks of 2008 relative to the lows for the year.
Although the economic crisis began in the U.S., prices dropped less there than in Europe or Japan. This is primarily due to the U.S. Federal Reserve’s quick and decisive reaction to the crisis, reducing prime interest rates from 4.25% to 0.00 to 0.25% in the space of a year. Money market liquidity was also increased significantly. In contrast, still dominated by fears of inflation, the European Central Bank raised interest rates by 25 basis points to 4.25% in the summer of 2008. The rounds of interest rate reductions did not start in the Eurozone until October.
The U.S. Dow Jones Industrial Index fell by 33.8% in 2008, and the Eurostoxx 50 Index by 44.3%. The Japanese Nikkei 225 lost 42.1% over the year.
As a result of high investor risk aversion and the particularly high expectations they had previously held for these economic areas, emerging market performance was even weaker than the established markets in 2008. The Eastern European CECE Index, which is calculated in euros, recorded a drop of 53.5% over the year as a whole. This included the effects of currency devaluations affecting the countries of the CEE region in the 4th quarter of 2008.
Compare to 2007