World Financial Crisis Will Hurt The Caribbean

Sep 28, 2008 Features / Columnists, Ronald Sanders

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By Sir Ronald Sanders

Events in the financial markets in the last few weeks portend a world of great uncertainty and instability that will have an adverse impact on the economies of developing countries, including those in the Caribbean.

The managing-director of the International Monetary Fund, Dominique Strauss-Kahn has estimated the overall cost of the global financial crisis at $1.3 trillion.

The pillars of capitalism have been rocked in the United States with the collapse of major investment banks and a proposal that the US tax payers fork out $700 billion to rescue the battered financial system.

But that doesn’t count the cost of the recent bailouts of two other US government organisations with the astonishing names, Fannie Mae and Freddie Mac that were created to provide funds to private mortgage lenders. Bailing them out cost another $200 billion.

The language of the US Treasury Secretary, Henry Paulson, says it all: “The US economy is in imminent peril if Congress delays approving a 700-billion-dollar rescue”. The reality is that the US economy is already in recession and likely to remain there for the foreseeable future.

It is particularly troubling that this cataclysmic event is taking place while the US government is on the brink of change. The people in charge – and who have to make hard decisions now – will not be there in three months’ time, and the Presidency of the US after November is still an open question. This situation adds to the uncertainty.

The plans for America that the two presidential candidates, Barack Obama and John McCain, have each been proclaiming have now receded deep into the realm of possibilities only.

For if $900 billion of government money is poured into propping up the financial system, there won’t be much room for Obama’s ambitious plans for health care, education and energy. Out the window too will go McCain’s plans to cut taxes.

The good news for Obama is that, at the time of writing, the most recent ABC News/Washington Post Public Opinion Poll shows that he leads McCain by 52% to 43%, with only 5% undecided.

It is the first time that Obama has surpassed the 50% mark. On the question of which of the two understands the American economic problem better, Obama has a 24% lead over McCain.

Europe is not immune from events in the US, and financial markets are jittery. Uncertainty has cast a pall of gloom across European capitals.

In Britain, the Prime Minister, Gordon Brown, is fighting for his political life both from within his own Party and from the opposition Conservative Party.

Elements within his own party regard him as a liability and are keen to dump him before the next election. As his Labour Party held its annual conference, it was 30% behind the Conservatives who have a new spring in their step.

Amid all this, Brown, who had been Chancellor of Britain for 10 years, before he pushed Tony Blair out of the premiership, has been trying to show that his is a safe pair of hands, but he is doing so in a time of a severe economic downturn in which property prices are dropping dramatically, mortgage rates are rising, and unemployment is increasing.

The Confederation of British Industries has reported that retail sales fell for a sixth month in a row this September, although there was a slight improvement on the devastation felt in August. It came as business confidence crashed in the eurozone’s three largest economies – Germany, France and Italy – leaving the region on the brink of recession.

What all this means for the Caribbean is that there will be a slump in tourism in the coming winter and into the next year.

As job losses increase in the US, UK and parts of Europe, and oil prices continue to remain high at over $100 a barrel, people, apart from the very wealthy, will cut back on travel.

Aid programmes are also likely to slow down as governments of European nations, the US, and Japan divert much needed funds away from anything but humanitarian aid, to domestic projects which help to keep them in office.

We can be sure that commitments made by the G8 nations to Africa under the New Partnership for Africa’s Development (NEPAD) which have already begun to slip will slide even more.

At their 2005 summit in the Scottish town of Gleneagles, G8 countries – the United States, Japan, Germany, France, Britain, Italy, Canada and Russia – undertook to increase aid to Africa with an extra 25 billion dollars per year by 2010.

Since then, several revisions have lowered the figure to 21.8 billion dollars, and according to the UN, development aid has only increased by about a quarter of that amount.

And, those in the Caribbean who place their faith in the European Union (EU) coughing up money as a sweetener for singing-on to the controversial Economic Partnership Agreement (EPA) should not hold their breath.

It is unclear how much of the foreign reserves of Caribbean governments are held in US dollars or what portion of those funds were invested, through US investment banks, in the property market or other instruments that may now be unstable. It has to be hoped that it is very little, if any at all.

The same observation is relevant to financial institutions, such as banks and insurance companies, in the Caribbean, which may also be exposed to the crisis in the US through their own investments of Caribbean savings, pension funds and other securities. Whatever the situation, the Caribbean should not expect to come out unscathed from this crisis.
(The writer is a business consultant and former Caribbean diplomat)
Responses to: [email protected]

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