Talking about people in the world "losing hope" and "losing the will to fight", i think people should read all the Cases of "On a Way to a Smile". Seriously, Sephiroth totally fuc*ed the world. With the fall of Shinra and his Meteor destroying Midgar, Mako wasn't being used anymore. And because of that, almost all the machines in the world became useless(because Mako was the primary source of energy in the world). It was basically a retrocess in society. And in the same time, many and many people in the world were sick or dying from an incurable disease. And with all that, came the depression. Everyone was sad. This feeling of depression is very clear in the novelas, principally "Case of Barret".

If we talk about "making people sad, losing their will to fight and their hopes", the fear of Meteor is nothing compared to what Sephiroth's Meteor(destroying Midgar) and Geostigma did.