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WTC: Attacks May Bring Global Recession
By Reuters

12/9/2001 9:25 pm Wed

Wednesday, September 12, 2001

Attacks may bring global recession

REUTERS in Washington

New York's World Trade Centre, an icon of global capitalism, crumbled on Tuesday after a series of attacks, leaving Wall Street in clouds of smoke and rubble and raising the spectre of a global recession.

Economists said a global economic contraction was almost certain as world stock markets plunged, the US dollar spiralled lower against the yen and euro, and oil and gold prices soared after terror attacks on landmarks in New York and Washington.

Analysts speculated the catastrophic events could deal a hammer blow to US confidence and could send already wary investors fleeing to gold and other assets which benefit in uncertain times.

For years the United States has been seen by investors everywhere as a safe haven - a place where trillions of dollars could be invested, offering returns typically better than those available in Europe and elsewhere.

But terrorist attacks that caused both towers of the World Trade Centre to collapse and left the US Pentagon in flames will have a devastating effect on confidence in the US economy, which was already teetering on the precipice of recession, economists said.

Markets were shut across the United States, which attracts almost two-thirds of all global capital flows, in the wake of the attacks and were to remain closed on Wednesday.

This added to the uncertainty about how American markets would react to the tragedy.

''A full-blown global recession is highly likely,' said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis.

''Recently, the economy has been on a high wire act, straddling between a recession and an anaemic growth; [this] damage to confidence will push us into a recession,'' he said.

The US Federal Reserve said it was open and operating and that its discount window would provide liquidity as necessary.

Federal Reserve Bank of New York President William McDonough, speaking in Switzerland, said the US central bank would, ''provide that liquidity which is needed''.

Later, the European Central Bank said it also stood ready to provide liquidity to keep financial markets functioning.

US Treasury Secretary Paul O'Neill sought to reassure markets, saying he has every confidence in the financial system's ability to weather the latest challenge.

''Our nation's financial markets are strong and resilient,'' Mr O'Neill said in a statement issued from Japan, where he is travelling and where he will remain until further notice.

''In the face of today's tragedy, the financial system functioned extraordinarily well, and I have every confidence that it will continue to do so in the days ahead,'' he said.

The closure of markets on Wednesday will mark only the second time the New York Stock Exchange has shut for two consecutive days, the last being in honour of the end of World War II in August of 1945.

Economists said there could be untold damage to the US financial system, noting many key stock market players in the World Trade Centre building were likely killed.

Mr Sohn said he expects a ''stampede'' of sell orders once American stock markets reopen, and a run on insurance companies, possibly crippling the financial system and forcing the US Fed to cut interest rates even further.

The Fed has already cut rates seven times this year by total of three full percentage points to try to reignite sputtering economic growth.

The unprecedented assault on key symbols of US military and financial power came as growth around the globe slows to a crawl. The US economy is barely growing, Europe's is slowing rapidly and Japan's actually contracted in the second quarter.

''This could really trigger a global recession,'' said Frank Holmes, chief executive of US Global Investors Inc.

Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York summed up the feelings of many, saying Tuesday's events meant, ''it won't be business as usual'' anymore.

''People will begin to invest and spend less as they try to determine what the future will bring. I can only imagine the stock market is very vulnerable,'' he said.

Before the attacks, the International Monetary Fund had expected global growth of just 2.7 per cent this year, down from almost 5 per cent last year, with the risk of a global recession rising - the top item on the agenda at the upcoming meeting of leading industrial nations in Washington later this month.

Economists said the worst-case scenario could be a massive capital flight out of US assets - something that could crush already weak US stock prices and banish the American economy into its first recession in more than a decade.

''The major risk is panic in the financial markets,'' said Kathryn Kobe, an economist at Joel Popkin & Co. in Washington.

''If for some reason the United States is no longer seen as a safe haven for capital...there could be some very large capital movements.''

Soaring oil prices in 1999 are widely blamed as a key reason the world economy began to slow late last year.

Tuesday's spike of more than 10 per cent in world crude prices to over US$31 a barrel was eyed nervously by analysts, who said higher oil prices would also hamper economic growth.

Parts of the US economy, notably the manufacturing sector, are already in recession. But consumers have remained confident, helping prop up the broader economy although economists said confidence will be rocked by Tuesday's events.

And the tumble in stock prices - if sustained when the New York stock market eventually reopens - could further injure confidence and spending, which in the United States has remained intact in the face of the slowdown.

The US economy, the world's richest, grew only 0.2 per cent in the second quarter and analysts feared that the attacks could finally turn that paltry growth rate negative.

And given that the attacks appear to have been perpetrated by terrorists, uncertainty could linger.

''The fact that US officials cannot rule out further attacks will keep consumers here and abroad in a deeply uncertain state,'' said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio.

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