Crisis lessons

OF SPECIAL CONCERN has been the impact of the terrorist strikes in the U.S. on the financial markets, in the U.S. as well as elsewhere. The city of New York is the world's most influential financial centre and the physical destruction and havoc caused there was probably meant to cause grievous damage in a symbolic sense too. The more direct loss in terms of human lives lost and property damaged has still not been estimated. To the financial markets, especially, the final bill of costs will be astronomical. The twin towers of the World Trade Center housed some of the best known names in the financial world.

Most experts believe that the September 11 attacks might have exposed the vulnerability of the global financial market mechanism in a way no other development has done. Part of the reason, of course, is that we are living in the information age. The financial markets have been in the forefront of harnessing technology which they have used to achieve a high level of integration and connectivity with one another. The scope for transmitting sentiment-affecting news is enormous just as it is instantaneous. Which simply means that it is not possible to shield the rest of the global markets from the deleterious impact of the terrorist attacks on the U.S. Moreover, the U.S. stock markets, the New York Stock Exchange and the Nasdaq have been leading the other stock exchanges and markets around the world. The American dollar is the only global currency overwhelmingly preferred by trade and commerce and in private transactions.

The uncertainty and confusion that have become characteristic of all financial markets since September 11 continue even as the Governments are doing their utmost to rebuild investor confidence. Unfortunately, that will take considerably longer. Both in the U.S. and in Europe, ameliorative packages have been announced for the airline industry, perceived to be very badly hit. In times of crisis it is not very clear as to how effective the classic remedies such as an interest rate cut or even a direct subsidy will be in boosting the market sentiment. Certainly, symbolism also counts in rebuilding morale. There was plenty of it in evidence when the New York Stock Exchange was restarted, with all its sophisticated systems in place after a break of just four working days.

In India, as elsewhere, the present juncture is also a time when the perceived connection between the financial economy and the real economy is looked at more closely. The terrorist strikes might push the already slowing U.S. economy into a full blown recession and that perception alone will stand in the way of a stock market rally. But when the U.S. starts to reconstruct, its economy will receive a stimulus which will surely be captured by the markets. In India the financial markets were already under strain reflecting in part the economic slowdown. But after September 11 there has been an aggravated fall with the BSE Sensex falling to an eight-year low and to below the psychological barrier of 3,000. The rupee had dipped to below 48 to the dollar although it has rallied since. Official reaction so far has been muted. Unlike in the past, the RBI has not intervened aggressively to prop up the rupee. The capital market regulator, the SEBI, has been content in liberalising investment rules for boosting liquidity. The learning experience for now is that while globalisation of markets is becoming a reality, it is facile to juxtapose the experiences of the West with India. Here, financial markets will have to be further reformed to more adequately mirror the real economy.

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Section  : Opinion
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