Prague stock exchange shaken by Bear Stearns emergency bailout

Photo: CTK

Stock markets around the world recorded heavy losses on Monday in reaction to the emergency bailout of US investment bank Bear Stearns. The Prague Stock Exchange was no exception, with the headline PX index dropping by almost 2.5 percent. Analysts said investors were responding to the unexpected collapse of the leading U.S. investment bank and the problems of the U.S. financial market in general. The Prague exchange saw something of a recovery on Tuesday, but the markets are still jittery. Jiří Staník is a senior analyst at the Prague-based investment bankers Wood & Co.

New York Stock Exchange, photo: CTK
“The markets were under huge pressure so it was like a panic that basically the markets were falling two or three percent. It was one of the worst days I’ve ever seen.”

Can you explain to the layman why it matters to the markets in Prague what happens to a bank in New York?

“The markets are so co-related, and if something really bad happens on the U.S. market, it has consequences for all the other markets. And especially if it is news like that, that one of the largest banks announces big losses. The first idea you have is – oh, there might be something wrong with a number of other banks as well, not only with American banks, and we might see some bad news with western European banks, and this would obviously affect more than just the U.S. equity markets. So with such big and bad news like that, it has consequences for all the other markets.”

And is this just about nervousness and gut feeling, or is it something more fundamental than that?

“It’s both. The problem is it’s very difficult to quantify what’s the risk of the losses of U.S. or western European banks, losses which are related to sub-prime or lending or U.S. real estate exposure. So basically every week or every month we hear news that such-and-such bank has written off so many billions of bad loans, another bank does another write-off, so we’re still not able to quantify the amount of potential losses and what will be the consequences for the economy, for the banking sector, for the real economy. So that’s why such bad and such big news affects the market so much.”

Photo: CTK
Do you think banks in central Europe could collapse as a result of the Bear Stearns near-collapse?

“Not at all, not at all. Central European banks have no or very limited exposure to the sub-prime or U.S. real estate markets. We checked all or most of the banks and they have very little or no exposure at all. There are some banks in western Europe that do have some exposure, but central European banks from this point of view are safe. In terms of direct exposure, they will make very little or no losses at all, but obviously directly they are already affected by the risk assessment. Right now it’s more difficult to issue bonds, share prices are under pressure despite the fact they will make no losses. So they are affected, whatever happens.”