Analysis 2009: The Financial Crisis Hits IT Hard

The recession that started in January 2008 looks to be four phased. The first phase, The housing collapse, actually started in August 2007. The financial meltdown hit in September 2008, and likely will continue through to March 2009 or so. The business firestorm is really just getting underway now, and will be the dominant theme for the next 8-12 months whlie the final phase, currency collapse, will (if it occurs at all) likely not happen for another 12-18 months.

The business collapse itself is taking place in a number of different verticals, which differentiates it from a traditional oversupply recession. In an oversupply recession, the market produces too much of a good or service for the available demand, which usually means that either companies have to cut back on producing goods (and consequently reduce their own profitability) or they fail and fall out of the market. In time, demand rises to meet supply, and the industry in question recovers.

The housing collapse was a classic oversupply recession - too many houses on the market at too high a price, and eventually demand couldn't meet supply. Had the housing market not been fueled by low interest rates when they weren't needed, had the financial industry not done a dice-o-matic on the resulting mortgages, and so on, chances are pretty good that we would be about 2/3 of the way through this by now, IT, except for the specific housing IT vertical, would be relatively unscathed.
The problem now is that risk became baked into the very core of the global financial system like a series of fault lines, and the collapse of the mortgage business was like a deeply buried mortar going off in that mess. This in turn exposed the very ugly truth about finance - that prices are psychological, and when no one knows the value of things, the ability to plan for the future ends.

This fear has manifested in the credit crunch, when banks are terrified of lending money out because they know that the assets that the carry are far below what they should carry in order to stay solvent - and that if they loan out money, they won't have it when the next wave of credit defaults occur (either credit cards or commercial real estate, take your pick - they'll hit about the same time). There's currently an effort to reliquidate the banks by most of the world's governments, though with at best limited success (more on that in future articles).

The business collapse is occurring because of two factors. First companies that had depended upon having readily available lines of credit are finding these lines being cut or dramatically reduced, which makes them much more vulnerable to the variability of incoming contracts ... at a time when everyone else is facing the same problem.

The second is that this has put significant downward pressure on household incomes, as these same lines of credit (in the form of second mortgage refinancing, credit cards and so forth) are now becoming scarce at the consumer level (along with financial investments having plummetted in the last few months). This has resulted in a consumer strike, as people save rather than spend.

For those businesses with a direct consumer face (or those that IT companies who supply services to these businesses) this translates into reduced revenues and shrinking demand, which in turn has a direct impact upon both those people that produce retail hardware and has an indirect effect upon IT companies that produce software to support these retailers. It also means that companies that had projects in the work for FY 2009 are scaling these back or putting them on indefinite hold until they get a clearer read of the economic situation.

One of the problems with recessions is that while there is an underlying economic aspect to most of them (many people just don't have the money in the first place), there is also a psychological aspect. People stop spending (and start saving), in anticipation of two things - first, that when they need the money, they may not have it, and second, that when the economy is receding, the overall price of both goods and services drop. It makes little sense to take on new purchases (whether new projects or new goods) when demand is dropping and the possibility is fairly strong that they can get those things for cheaper in a year or two.

At an individual level, this is a rational response. The problem comes when everyone does it. At that point, demand dries up, companies go out of business, reducing the overall stock of those same goods and services. This happens with all goods. The problem that we face right now is that the goods that are at the root of the problem - houses - tend to have a comparatively long shelf life compared to Tickle-me Elmo dolls or iPods. They can't be inventoried or written off, which means that it will take considerably longer for demand to meet supply, and as capital investments destroying houses and restoring the property to a usable state can be painful at best.

Unfortunately, this means that the psychological aspects of businesses far removed from housing will be very much held hostage to the housing cycle. Eventually (for a number of reasons) housing prices will stabilize at a new level of equilibrium (which, if reversion to the mean is any indication, should be about 15% below where most prices are now), though it is also likely that any markets will overshoot this level to about 25% or so below current levels before eventually returning to this mean. While estimates vary as to how long it will take, most economists feel that it will be at least another nine to eighteen months, putting the "bottom" of the recession at or around late 2009 or early 2010.

Yet even that won't necessarily be the end of the troubles. A deep financial depression is a lot like a deep cyclonic depression (a.k.a, a hurricane). In a hurricane, a great deal of damage is done by the winds, as windows break, cars go flying and in some cases houses go sliding into the depths or get turned into kindling. Yet the real damage comes from factors such as storm surges, where large amounts of water start moving quickly in areas not designed for water. Hurricanes knock out power, making recovery efforts difficult, and paradoxically, raises the possibility that fires will start that can't be reached or put out, causing even more damage.

The same thing is happening now - we are within the eye of the financial hurricane, a kind of false calm where the winds and pressures are at an unstable equilibrium, but this only has the effect of relaxing things that had bent in response to the hurricane force winds. Unfortunately, once we enter the eyewall on the other side the forces are just as strong, but going in the other direction (one of the reason hurricanes are so destructive).

When this plays out, many retail companies (and not a few medium to large sized malls) will be out of business, their buildings sitting vacant and often poorly maintained. There will be a significant exurban flight as people are forced to sell their properties (typically at a loss) because of unmaintainable mortgages and either rent closer in to population cores or move to higher density housing (this trend will be exacerbated by the number of baby boomers who are reaching retirement age and are staring at fixed incomes with oversized mortgages and reduced bank accounts), a trend which will result in many "bedroom communities" becoming squalid slums or just abandoned altogether.

Suppliers to these retailers are already starting to disappear as retailers cut back on their inventories, and in areas such as automotive manufacturing the tremors as these highly centralized, monolithic conglomerates continue to shutter plants are causing the extensive supply chains to fragment as companies that weren't sufficiently diversified lose their primary customers and go out of business.

As this happens, it also makes it harder for these same companies to continue to pay their leases, which are typically financed at a much higher rate than consumer mortgages are as most are fifteen year rather than thirty year paper. This will be the next major pressure that a lot of companies, even those outside of the retail sector, will be facing, and software companies in particular are vulnerable to this particular threat, especially as VC financing continues to decline. Expect by the end of 2009 that office buildings will be even more vacant than they were in 2003 at the bottom of the tech recession.

Venture capital, by the way, is also drying up for much the same reason as credit in general - VCs are investors, and they do not in general want to take a loss on a company, even one with a brilliant idea, if they are concerned that economic pressures will never let it get off the ground. Moreover, those same investors already have extant commitments that they are in many cases having to serve as the primary bank for, and this in turn is reducing their willingness to take on new businesses (and will for some time).

A further process that will accelerate is the disaggregation of conglomerates, as companies shed or spin-off divisions that are not profit centers. It's likely that this will hit the big services companies such as IBM, Fujitsu, Siemens and so forth disproportionately, though it might also affect companies such as Microsoft or Oracle. Many of the newly created spin-offs may not make it once cut off from the sheltering effect of the mothership, but others (most notably those that were already successful companies in their own rights) may very well come out stronger in the process.

The next year will be a poor one for mergers, unless they happen to be pure stock exchange mergers (where the two companies agree to on a common stock conversion rate with little actual money changing hands). Acquisition mergers typically require not only cash on hand, but also require access to bonds or other equities that can be used to leverage this cash on hand. With so much uncertainty right now in terms of equity prices, however, raising such funds becomes difficult, even as it seems like we are awash in a sea of junk bonds.

Toward the end of 2009, expect this trend to reverse. Companies with strong cash positions going into this storm will have a much clearer understanding of the shape of the market by the end of the year, and will be able to buy technically sound but financially distressed software companies at bargain rates. If you're vested in a startup, now is probably a good time to discuss acquisition strategies, though probably not at the premium values that many startups tend to value themselves, with an eye towards that sweet spot in the Q4 2009.

There's currently a running debate among economists about what happens when the recession ends. Some, primarily Keynesians, feel that economic stimulus is a necessity to get us out of the current liquidity trap, and that for the most part the debt that most countries are taking on now will restore us back to a period of economic stability with perhaps at worst only modest inflation (in the 3-4% rate) for a few years thereafter.

Others, especially those of the Austrian school of economics, expect that all of the money being created in order to finance the stimulus will, once the credit crunch eases, result in significant inflation, possibly above 10% per annum, leading to a similar situation (stagflation) that caused the 70s to be so hard (well, that and disco).

My money is on the Austrians, as they were surprisingly accurate in their predictions of the present economic crisis, and as a central part of the problem facing the economy right now is that real interest rates (those charged by banks to their primary customers) continues to remain far higher than the nominal 0.25% percent rate that the current Fed has set the prime lending rate.

In short, even after the storm abates, money may continue to be in short supply for many months (or even years) to come. Expect that government stimulus packages and government works programs may in fact have to substitute for the private economy for some time (more on that in the next section).

Alistair Darling urges EU to help out poorer economies

The wealthier nations of the EU must step in to prevent their less well off neighbours from going bust, Alistair Darling, the Chancellor, has warned.
Speaking ahead of a meeting of European Union finance ministers, Mr Darling warned that the financial crisis facing some Eastern members was so serious that entire economies were in danger of going under.

And he insisted that it was imperative for nations including as the UK to come forward to help, despite the growing recession and financial difficulties battering our own economy.
Asked how Britain could afford to help other nations when it was itself in crisis, Mr Darling told Radio 4's Today programme: "If we don't sort these problems out and try to resolve them, it will affect us, because our well-being, our wealth as a country, depends on the health of Europe, it depends on the health of the emerging countries in South America and India and China and so on.

"We are all in this together... All politics are global now and that is why we need to take action."

Mr Darling warned that central and eastern European economies faced a 2009 funding shortfall of $100 billion - around £72 billion - and called on the G20 group of leading economies to agree additional support via the IMF.

Finance ministers from the G20 are due to arrive in London at the weekend for talks, while heads of government will gather under Gordon Brown's chairmanship next month.

Mr Darling added: "There is no doubt that the present situation is uncertain. There is a lot of turbulence out there, as people can see, but I am very clear that yes we can play our part in supporting the economy, we can help restore the banking system so that it starts functioning effectively again.

"But we must, must, must act together. That's why today's meeting in Brussels is important. That's why the G20 meeting is very, very important. Acting together will make a real difference.

"One of the things we are discussing at the G20 meeting this weekend is how do we help each other, because if we do that then this downturn will be a lot less painful than would otherwise be the case."

Beyond central and eastern Europe, the countries most vulnerable to drying up of international credit are concentrated in sub-Saharan Africa

The World Bank has estimated that 129 developing countries are facing a financing shortfall of between $270 and $700 billion.

The Chancellor urged his EU counterparts to step support for developing nations, but said that assistance must first go towards hard-hit central and eastern European countries in order to stop the entire Union from getting into serious financial trouble.

Financial crisis calls for deeper RBI rate cuts

NEW DELHI: There’s monetary policy action by the Reserve Bank of India, or so it would seem. The RBI has reduced, yet again, its policy read interest rates, so as to boost the faltering growth momentum. The repo rate, the rate at which the central bank lends short-term to banks, has been reduced by 50 basis points–half a percentage–to 5%. Also, the reverse repo rate, the rate at which the RBI accepts short-term bank deposits, has been lowered by 50 basis points to 3.5%. Yet it appears that the monetary authority is erring on the side of caution.

The latest rate cut is certainly a move in the right direction, and to the extent that it sends the right signals of easier interest rates around the corner, it is clearly welcome. But deeper rate cuts are surely warranted, given the unprecendent global financial crisis, the severe recession abroad and much deceleration on the domestic growth front. Since mid-September, the RBI has reduced the repo rate about five times–from 9 to 5%. And it has revised the reverse repo rate at least thrice, from 6 to 3.5%. In a slowdown, the small reductions in the rates may not quite have sufficient policy impact on the ground.

The latest RBI figures do in fact indicate non-food bank credit has decelerated further to 19.7% year-on-year as on February 13, as compared with 22.7% growth as on February 15, last year. Worse, credit expansion during the period between December 19, 2008 and February 13, `09 at Rs. 8,091 crore–as per RBI data–was sharply lower than that of Rs. 86,978 crore in the corresponding period of the previous year. This is a huge deceleration indeed! It’s telling that the total flow of resources to the commercial sector from banks and non-banks during fiscal 2008-09–up to February 13–at Rs 4,98,136 crore was lower than Rs 6,08,351 crore during the corresponding period of the last fiscal.

The RBI note announcing the reduced policy rates does emphasis that the cumulative amount of "actual or potential primary liquidity" in the financial system, thanks to various measures initiated by it, is "comfortable" at over Rs 3,88,000 crore. Note that the central bank has reduced the cash reserve ratio (CRR) for banks from 9% to 5% of net demand and time liabilities (NDTL), and the statutory liquidity ratio (SLR), the minimum extent to which banks need to invest in government securities, from 25% to 24% of NDTL.
The reduction in SLR by one percentage point of NDTL may have made available liquid funds of the sum of Rs 40,000 crore for the purpose ofcredit expansion. Yet there’s the sharp reduction in credit offtake in recent months.

It does require more proactive and looser monetary policy. In the latest instance of rate cuts, it would have made better policy sense to reduce the repo rate by 100 basis points–a whole percentage point–and similarly lowered the reverse repo rate as well. The point is that given the sharp reduction in the inflation rate, as measured by y-o-y variations in the wholesale price index (WPI), real interest rates–approximately the nominal interest minus the inflation rate–are much too high. The WPI has declined to 3.36% as on February 14, down by almost three-fourths from the high of 12.91% last August.

The fact remains that since the inflation rate over the course of a bank loan is not really known, the volatility in the inflation rate does represent a risk to both banks and borrowers. Actually, credit and interest rate risks are two of the most important sources of risks for commercial banks. Given that the demand for credit does depend on real interest rates, the central bank needs to purposefully indicate lower cost of funds for banks by being proactive on policy rates. In tandem, the objective ought to be to effectively lower the cost of funds for banks, so that there is increased supply of lonable funds at the right rates. Banks do borrow money at short maturities to onlend to households and companies at longer maturities. Hence the real risk for asset liability mismatches, in banks. Also, in the backdrop of a slowdown and increased credit risks, with intereste rates falling and the consequent rise in the prices of government bond portfolios, banks may be all the more chary to lend. The bottom line is that banks need to holistically access both credit and interest rate risks, and better intermediate between savers and borrowers, for the greater good.

Corporate Borrowing Costs Surge to Record on Depression Scare

Corporate borrowing costs surged to a record in Europe on concern the credit crisis will deepen into a global depression.

Investors are demanding the highest yields relative to government debt to buy European investment-grade corporate bonds. The spread widened 20 basis points to 442 basis points this week, beating the previous record of 438 basis points on Dec. 26, according to Merrill Lynch & Co. data.

“Investors are scared that a 1930s style depression is no longer a mere tail-end risk,” said Georg Grodzki, head of credit research at Legal & General Group Plc, which manages more than 110 billion pounds ($156 billion) of assets. “It is easy to see why even some real-money investors are running for the exit because of waning confidence in the effectiveness of the measures being taken.”

Governments from the U.S. to Australia have sought to introduce policies to bolster their economies as a deepening global recession sent stocks in the MSCI World Index to a 24 percent plunge this year, the worst start to a year since the gauge was created in 1970. A Labor Department report today may show employers in the world’s largest economy cut payrolls by 650,000 and the unemployment rate surged to a 25-year high of 7.9 percent, according to a Bloomberg News survey.

The cost of protecting bonds sold by European banks and insurers from default surged to records on concern they will have to add to the almost $1.2 trillion of losses and writedowns financial companies worldwide have taken since the start of the credit crisis.

Financial Index

The benchmark Markit iTraxx Financial index of credit- default swaps linked to the senior debt of 25 banks and insurers jumped 7 basis points to a record 202, according to JPMorgan Chase & Co. prices. The subordinated index surged 20 basis points to an all-time high 385.

“Investors in financial companies feel like they’ve gone 10 rounds with Mike Tyson, they’re so beaten up,” said Gary Jenkins, a strategist at Evolution Securities in London. “If you can’t restore confidence in financials, you can’t restore confidence in the economy. We’re in the middle of a crisis of the global financial system.”

A Merrill Lynch & Co. index showing the yield premium investors demand to hold the lowest-rated debt issued by European insurers had its biggest gain this year, soaring 92 basis points to 2150. A gauge showing the spreads on similar debt at banks jumped 90 basis points to 3426.

Default Concern

Investor concern that defaults among companies with high- risk, high-yield credit ratings will soar as economies slow drove the benchmark Markit iTraxx Crossover index of credit-default swaps on 50 sub-investment grade companies in Europe 12 basis points higher to a record 1,165. The index traded as low as 189 basis points at the start of the credit crisis in June 2007.

The default rate on speculative grade companies rose to 5.2 percent in February, up from 4.8 percent a month earlier, Moody’s Investors Service said yesterday. The default rate will rise to 22.5 percent in Europe and 13.8 percent in the U.S. by the end of the year, Moody’s said, the highest since the 1930s.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality.

A basis point on a credit-default swap contract protecting 10 million euros ($12.7 million) of debt from default for five years is equivalent to 1,000 euros a year.

EU worry over inter-bank lend limits

The ECB raised concerns about EU plans for bank-to-bank lending limits today, saying it could make it harder for banks to cope with a repeat of the credit crunch.

The EU plans included a recommendation to impose a limit on inter-bank exposures of 25 percent of the credit institution's own funds or the amount of E150 million, regardless of their maturity.

But the ECB said the idea may not be a good one, as banks could find it harder to cope with a repeat of the credit crisis.

"Internal quantitative analysis by the ECB suggests that a non-negligible share of banks would have been constrained in their overnight lending activities in a substantial number of transactions if the limit had been in place before the start of the financial market turmoil in August 2007," it said in legal opinion published on its Web site.

"This constitutes a substantial and undesirable change when compared to the current EU legal framework." The ECB went further in its criticism, saying it could hamper its own monetary policy role.

"From a monetary policy implementation perspective, the ECB is of the view that the above proposed limit would constrain the smooth flow of liquidity within the inter-bank market and could be detrimental to the smooth functioning of the euro money market."

EU states have already reached a preliminary agreement on the plans. The European Parliament, which has a joint say on the measures, holds a committee vote on Monday before a final deal with EU states in April.

Growing Economic Crisis Threatens the Idea of One Europe

PARIS — The leaders of the European Union gathered Sunday in Brussels in an emergency summit meeting that seemed to highlight the very worries it was designed to calm: that the world economic crisis has unleashed forces threatening to split Europe into rival camps.

An urgent call from Hungary for a large bailout for newer, Eastern members was bluntly rejected by Europe’s strongest economy, Germany, and received little support from other countries. Chancellor Angela Merkel of Germany, facing federal elections in September, said countries must be dealt with on a case-by-case basis.

“Saying that the situation is the same for all Central and Eastern European states, I don’t see that,” Mrs. Merkel told reporters. She spoke after Prime Minister Ferenc Gyurcsany of Hungary warned, “We should not allow that a new Iron Curtain should be set up and divide Europe.”

With uncertain leadership and few powerful collective institutions, the European Union is struggling with the strains this crisis has inevitably produced among 27 countries with uneven levels of development.

The traditional concept of “solidarity” is being undermined by protectionist pressures in some member countries and the rigors of maintaining a common currency, the euro, for a region that has diverse economic needs. Particularly acute economic problems in some newer members that once were part of the Soviet bloc have only made matters worse.

Europe’s difficulties are in sharp contrast to the American response. President Obama has just announced a budget that will send the United States more deeply into debt but that also makes an effort to redistribute income and overhaul health care, improve education and combat environmental problems.

Whether Europe can reach across constituencies to create consensus, however, has been an open, and suddenly pressing, question.

“The European Union will now have to prove whether it is just a fair-weather union or has a real joint political destiny,” said Stefan Kornelius, the foreign editor of the German newspaper Süddeutsche Zeitung. “We always said you can’t really have a currency union without a political union, and we don’t have one. There is no joint fiscal policy, no joint tax policy, no joint policy on which industries to subsidize or not. And none of the leaders is strong enough to pull the others out of the mud.”

Thomas Klau, Paris director of the European Council on Foreign Relations an independent research and advocacy group, said, “This crisis affects the political union that backs the euro and of course the E.U. as a whole, and solidarity is at the heart of the debate.”

The crisis also has implications for Washington, which wants a European Union that can promote common interests in places like Afghanistan and the Middle East with financial and military help.

“All of that is in doubt if the cornerstone of the E.U. — its internal market, economic union and solidarity — is in question,” said Ronald D. Asmus, a former State Department official who runs the Brussels office of the German Marshall Fund.

The problems are basically twofold: within the inner core of nations that use the euro as their common currency, which together have an economy roughly the size of the United States’; and within the larger European Union.

The 16 nations that use the euro — introduced in 1999, and one of the proudest European accomplishments — must submit to the monetary leadership of the European Central Bank. That keeps some members hardest hit by the economic downturn, like Ireland, Spain, Italy and Greece, from unilaterally taking radical steps to stimulate their economies.

Germany once vowed never to bail out weaker members in return for giving up its strong national currency, the deutsche mark. But German leaders are now faced with the unpalatable prospect of having to put German money at risk to bail out less responsible partners that do not adhere to European fiscal rules.

Within the larger European Union, fissures are growing between older members and newer ones, especially those that lived under the yoke of Soviet socialism. Some countries of Central Europe, like the Czech Republic and Poland, are doing relatively well. Others, including Hungary, Romania and the Baltic states, are in a state of near-meltdown.

But only two newer members — tiny Slovenia and Slovakia — are protected by being among the countries that use the euro, and there was little support on Sunday for changing the rules to allow more to join quickly.

Many new members have seen their currencies plummet against the euro. That has made their debt repayments to European banks, their primary lenders, a much greater burden even as the global recession has meant a plunge in orders from consumers in the West. Some countries are asking for aid, both from their European partners and from the International Monetary Fund, to prop up their currencies and the banks.

While Western European countries are reluctant, with their own problems both at home and among the countries using the euro, there is a deep interconnectedness in any case.

Much of the debt at risk in Eastern Europe is on the books of euro zone banks — especially ones in Austria and Italy. The same is true of problems farther afield, in Ukraine, which is not yet a member.

Having watched the Soviet Union collapse, the countries of Central and Eastern Europe embraced the liberal, capitalist model as the price of integration with Europe. That model is now badly tarnished, and the newer members feel adrift.

Before the larger European summit meeting on Sunday, the Poles called an unprecedented meeting of nine of the new member nations in the East to discuss common grievances.

Prime Minister Mirek Topolanek of the Czech Republic, which holds the rotating presidency of the European Union, tried to ease tensions, insisting that no member would be left “in the lurch.”

“We do not want any dividing lines; we do not want a Europe divided along a north-south or east-west line, pursuing a beggar-thy-neighbor policy,” Mr. Topolanek said.

But his Hungarian colleague, Mr. Gyurcsany, called for a special European Union fund of up to $241 billion to protect the weakest members. His government circulated a paper on Sunday suggesting that Central Europe’s refinancing needs this year could total $380 billion.

“Failure to act,” the paper said, “could cause a second round of systemic meltdowns that would mainly hit the euro zone economies.”

Mrs. Merkel opposed an undifferentiated package, although she suggested on Thursday that targeted help might be offered to specific countries, like Ireland.

Governments of the countries of the European Union have already spent a total of $380 billion in bank recapitalizations and put up $3.17 trillion to guarantee banks’ loans and try to get credit moving again.

On Friday, the European Bank of Reconstruction and Development, the European Investment Bank and the World Bank said they would jointly provide $31.1 billion to support Eastern European nations, but much more will be needed.

Mr. Klau, of the European Council on Foreign Relations, sees a worrying loss of faith in a certain brand of capitalism. “It’s politically dangerous there since they’ve just emerged from an ultraregulated and stifling system, were confronted with shock therapy that created great hardship, and are just beginning to recover and stabilize,” he said. “Now they’re thrown back into an economic and political cauldron.”

The new members are finding that their European partners are putting their own national interests ahead of “collective and necessary solidarity,” Mr. Klau said.

Charles Grant, director of the Center for European Reform, a research group in London, is more sanguine, however. “My expectation is that the euro zone countries, out of pure self-interest, will bail each other out,” he said. “For Central and Eastern Europe it is too early to say there won’t be solidarity. But non-E.U. countries in the east — particularly Ukraine — seem to be the No. 1 worry.”

Economic Crisis Makes 90,000 Bulgarians Jobless

Nearly 90,000 Bulgarians suffered from the large scale layoffs the global financial and economic crisis caused end last year, according to data of the National Statistical Institute. The number of employed in Bulgaria in July 2008 was 2.52 million while in December 2008 it went down to 2.43 million. The number of workers under regular labour contracts decreased particularly sharply in the last three months of 2008 - from October to December - when 2.4 percent of all working Bulgarians remained jobless. Construction was among the most heavily affected sectors as it had to part with 7.2 percent of its workers. Hotels and restaurants suffered even greater: they parted with 13,8 percent of their staff. Agriculture laborers decreased by 12,3 percent.

The man who has lost £3bn in the recession admits: 'I did some dumb things in 2008'

Warren Buffett, one of America's richest men, has lost £3bn in the recession, it emerged last night.

Buffett, who started his working life selling fizzy drinks door-to-door, is nicknamed the Sage of Omaha for his legendary financial acumen, but even he cannot escape the carnage.

His investment company Berkshire Hathaway yesterday reported that profits fell 62% last year, reducing its value by £8bn and making it the worst year for Buffett since he took control 44 years ago.

Buffett's losses flow from his 40% stake in Berkshire, which invests in property and insurance companies, but also has holdings in household names such as Coca Cola, American Express and the Washington Post

In his annual letter to shareholders Buffett says investors finished 2008 "bloodied and confused" because of the dysfunctional credit market and other financial turmoil. Berkshire was particularly damaged by losses from derivatives, investments tied to the stock market, which Buffett once described as "weapons of mass financial destruction".

He says the recent credit boom made many people adopt a creed he used to see on restaurant walls years ago. It read: "In God we trust, all others pay cash." Now, Buffett is certain that "the nation's economy will be in a shambles throughout 2009, and for that matter, probably well beyond".

But he is not entirely gloomy: America has faced bigger challenges in the past, including two world wars and the Great Depression. "America's best days lie ahead," he said.

Buffett, a close friend of the Microsoft founder Bill Gates, has seen his shares in Berkshire halve in value since the summer of 2007. In his letter to investors, he admits that "in 2008, I did some dumb things". The dumbest was buying a large holding in energy company Conoco Phillips when oil prices were near their peak. "In no way did I anticipate the dramatic drop in prices that occurred."

Buffett says he also spent $244m on stock in two Irish banks that appeared cheap. But since then, he has written down the value of those purchases to $27m.

He has described the credit crunch as akin to "an economic Pearl Harbor" and has predicted that the recession will be "long and deep".

Buffett, a congenial 78, is still worth tens of billions of dollars, but shareholders in Berkshire worry about who will take over. "He is irreplaceable," says one.

EU 'consensus' to tackle crisis

EU leaders have ended an emergency summit in Brussels saying they are determined to avoid protectionist moves in response to the economic crisis.

"There was consensus on the need to avoid any unilateral protectionist measures," European Commission president Jose Manuel Barroso said.

He spoke after the summit aimed at heading off a new east-west rift.

Hungary earlier called for a 180bn-euro (£160bn) aid package for Central and Eastern Europe - but that was rejected.

Germany's Chancellor Angela Merkel said the former communist countries - the newest EU member states - were not all in the same situation.

'Just and fair Europe'

The summit followed the French president's pledge to help his nation's car industry if jobs were safeguarded in France.

President Nicolas Sarkozy's move raised fears that national protectionism could scupper hopes of recovery within the EU. The Czech Republic, current holder of the EU presidency, condemned his comments.

UK Prime Minister Gordon Brown said "today was the start of a European consensus on all these major issues that are facing the world community", including "no to protectionism".

After chairing the talks on Sunday, Czech Prime Minister Mirek Topolanek said: "We need a Europe without barriers but also a just and fair Europe."

"I think that it was perfectly clear that the European Union isn't going to leave anybody in the lurch," he told a news conference.

But there was no announcement of any new EU aid package for the badly-hit economies of Central and Eastern Europe.

Mr Topolanek also said US President Barack Obama would visit Prague on 5 April.

East-west differences

Hungary's Prime Minister Ferenc Gyurcsany warned earlier against allowing a "new Iron Curtain" to divide the continent.

Many of the newer EU members in Central and Eastern Europe have seen their financial institutions and economies battered by the downturn. They are faced with plunging currencies, factory closures and in some cases social unrest.

Hungary and Latvia especially are facing serious liquidity problems. They are already receiving billions of euros from an EU emergency fund.

Commission president Barroso said agreement was reached on a framework for dealing with the toxic assets on bank balance sheets that have crippled lending.

He also stressed that the EU was putting substantial funding into Central and Eastern Europe. He said 7bn euros of structural funds would go to the new member states his year, including 2.5bn for Poland.

Another 8.5bn euros from the European Investment Bank would help small and medium-sized firms in the region this year, he said.

The summit, called by the Czech Republic, came just a week after the same EU leaders met to discuss reforming the region's financial system.

President Sarkozy denied accusations of protectionism levied at his 3bn-euro bail-out plan, which aims to keep French carmakers manufacturing in France.

However, he said that if the US defended its own industries, perhaps Europe should do the same.

Prime Minister Brown - who will become the first European leader to hold talks with President Obama this week - said the G20 talks next month represented an opportunity to agree "a new deal".

"Only by working together will we deliver the EU and international recovery we need."