Fri, Sep 14, 2001 page24

• World Business: Capitalism strikes back to fight doubt

  ECONOMIC IMPACT Experts predict the US attacks were likely to result in a negative reading for third-quarter GDP growth without inflicting permanent economic damage

  • REUTERS
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  Policy makers and central banks around the world are pulling out the stops to prevent the US terror attacks from so unhinging business and consumer confidence that a recession becomes a self-fulfilling prophecy.

  Federal Reserve Bank of Dallas President Robert McTeer spoke for many on Wednesday when he said it was too soon to determine the economic impact of the attacks.

  "It won't depend as much on what happened as how we react," he said.

  McTeer was optimistic about the economic outlook and said historically, market reaction to disasters has been short-lived.

  That sentiment was shared by many financial analysts and investment banks, with J.P. Morgan calling the attack a significant but very temporary blow to the economy.

  In its first assessment of the economic damage of Tuesday's terror strikes, Morgan said the disruption to travel and retail activity was likely to result in a negative reading for US third-quarter gross domestic product growth.

  "However, there will not be lasting disruptions to the US economy or its financial system," the bank said. "A return to normalcy should be evident by next week."

  Longer term, it depended on the US political and military response to the attack. A limited reaction against terrorist groups would have little economic impact.

  "In contrast, a conflict that directly involves another nation state -- particularly an oil producing nation -- would have much more serious ramifications," the investment bank said.

  Confidence chorus

  Japan's top government spokesman said yesterday it was natural for the Group of Seven countries to coordinate for global financial stability in the wake of the US attacks.

  "It is natural that the G7 should do its best to pursue our common interest," Chief Cabinet Secretary Yasuo Fukuda said.

  Japan's top financial diplomat, Haruhiko Kuroda, said he expected that a meeting of G7 finance ministers scheduled for Sept. 28 would "naturally be held," though he had yet to get official notice that it was going ahead.

  Annual meetings of the World Bank and IMF are expected to be cancelled, stirring some talk the G7 meeting might also be called off.

  G7 finance ministers and central bankers issued a statement on Wednesday saying they were "committed to ensuring this tragedy will not be compounded by disruption to the global economy" and they "stand ready to take further action as necessary."

  The IMF added an upbeat declaration of its own, saying it expected only a limited impact on the global economy from the attacks and it stood ready to help countries that may need it.

  "Our present assessment is that, despite the scale of the human tragedy, these terrible events will have only a limited impact on the international economy and global financial system," IMF Managing Director Horst Koehler said.

  Adding to the chorus, Swiss National Bank Vice-Chairman Bruno Gehrig said he expected the US stock market to bounce back quickly, helping restore calm to jittery global markets.

  "I assume, at the start, there will be a certain decline, but I would be amazed if there would be a collapse, as some fear," he said, voicing hope that an American sense of solidarity and patriotism would keep sentiment strong despite the shock.

  The US Securities and Exchange Commission said it was considering the unusual step of easing restrictions on corporate share buybacks to help provide liquidity when markets do reopen.

  Flush with cash

  On a practical front, central banks were doing their part to keep markets flush with liquidity, with the Fed, the Bank of Japan (BOJ) and the European Central Bank (ECB) injecting no less than US$120 billion into the banking system on Wednesday.

  The Fed alone pumped US$38 billion in temporary reserves into the system, around 10 times the daily average. It also "substantially elevated" the discount window borrowing, a major concession to commercial banks since they can borrow at just 3 percent, half a point below the usual funds rate.

  The ECB has a scheduled policy meeting later yesterday, though analysts assume a cut is unlikely given the bank President Wim Duisenberg on Wednesday said it might prove counterproductive to rush into hasty moves.

  Nevertheless, a Reuters poll of analysts found many had raised the odds of an easing, particularly if the Fed were to take early action.

  The Fed's next scheduled meeting is on Oct. 2 but the bank is not shy of taking aggressive action and has already twice cut rates between meetings this year.

  Fed Chairman Alan Greenspan was back at his desk in Washington on Wednesday, having hitched a lift from Switzerland on a military flight, and markets were awash with talk that he would arrange an emergency cut, perhaps in the next few days.

  There was also speculation the BOJ could take further easing steps at its policy meeting next Tuesday.

  Early yesterday, BOJ Policy Board member Toshio Miki said the Japanese economy was moving backwards and the bank was studying ways to stem deflation.
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