The reverberations from the continuing tectonic shifts in the US financial markets are being felt around the world and we in Jamaica cannot feel ourselves insulated from its effects.
Indeed, as the old cliché goes, if America sneezes, our region is almost certain to catch a cold. Perhaps!
That cold, however, need not lead to pneumonia and it doesn't have to be the death of us if Jamaica is watchful and prudent.
Should the state of the environment have escaped anyone, we remind readers of developments in the United States this last weekend and what has happened in that country's banking system in the last six months.
On Sunday, the 158-year-old Lehman Brothers, one of America's major investment banks, filed for Chapter 11 bankruptcy protection after Britain's Barclays Bank pulled out of acquisition talks.
Lehman Brothers is estimated to be sitting on around $60 billion of the ruinous subprime mortgage debt that has, over the last year, pulled down or weakened banks in several markets.
Rescue package
As the Lehman Brothers directors were taking their decision, another iconic, but troubled US investment bank, Merrill Lynch, was announcing its acquisition, by Bank of America, in a stock-deal worth $50 billion. Merrill Lynch has written down about $40 billion of its value over the past year.
At the same time, the big insurer AIG requested a $40-billion rescue package from the Federal Reserves, and a group of 10 global banks announced a $70-billion fund, on which banks with liquidity problems can call.
Just last week, the US government effectively renationalised the mortgage credit institutions Freddie Mac and Fannie Mae, which combined, hold or back around $5.4 trillion in mortgages. This was done in an effort to stave off the worsening of the crisis. Earlier in the year, the Feds facilitated the acquisition of a tottering Bear Stearns by JPMorgan Chase and Co.
Not unexpectedly, there is a decided softening in the US economy, which is likely to worsen. Business and consumer confidence will dip and countries like Jamaica can expect to feel the pinch.
Higher risk premium
For example, Jamaica can expect to be asked for a higher risk premium if it has to go to the financial markets for a top-up to roll over around US$350 million in bonds that comes due early next year. Happily, it sucked in a substantial portion of that early in the fiscal year and, if things get really tight, it can call on the central bank's reserves.
However, a downturn and declining confidence in America could hurt remittances and tourism, for which the US accounts for around 70 per cent of the visitor market. Remittances have, up to now, proved resilient, growing, annualised by around 10 per cent. In this scenario, hopefully, a slowdown will not be devastating.
The good thing is diversity has been built into Jamaica's tourism, thanks, in part, to the heavy investment by the Spanish chains, which have opened new markets. Should they be embraced, rather than being subjected to a simmering hostility, this will be positive for Jamaica. Of importance to Jamaica, too, is a recent fall in the price of oil and other commodities, which have been Jamaica's most troubling problem in recent times. This, and tight fiscal management, could allow Jamaica to dodge the worst of the storm.
The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.
