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By unknown | Oct 01, 2008 | COMMENTS [ 0 ]

Madoda Milazi

Madoda Milazi

The world will come to a standstill if the US fails to bail out its troubled financial institutions, local analysts said yesterday.

Jeremy Gardiner, director at Investec Asset Management, said if the "dot-com bubble" of 1995 to 2001 was a flat tyre, this crisis was the seizing of the engine.

"The economy cannot simply roll to the side of the road to change a tyre, and therefore the significance of this situation should not be underestimated," he said.

On Monday lawmakers rejected a $700billion bailout for the US financial system, which saw Wall Street stocks lose about $1,2trillion in value in one day for the first time ever. The market volatility cost the local bourse R199,5billion.

Christopher Gilmour, analyst at Absa Asset Management Private Clients, said the failure of the US Congress to pass the plan could have devastating global consequences. "Although it looks like a revised plan will be presented to congress as soon as possible - perhaps even by Thursday this week, it's not a slam dunk that it will be approved by the House of Representatives," said Gilmour.

He said if not approved, more US banks would fail and the credit crunch would become even more acute.

"But it goes way beyond that. US companies, small, medium or large, need working capital to pay their bills. As credit becomes more difficult to access, these companies either have to make an alternative plan or - in a worst case scenario - go bust," Gilmour said.

But already a lot of damage has been done. Since the beginning of the year, 600000 Americans have lost their jobs, pushing the unemployment rate up to about six percent. Some economists have suggested that this could go as high as eight percent by next year.

South African stocks ended more than three percent higher yesterday - breaking a two-day losing streak - following gains in overseas markets amid hopes of a fresh version of the US rescue deal. But traders said that global markets, including the JSE, remained troubled.

"It's a combination of bargain hunter-induced rebound and hopes that a new bailout plan is in the making in the US," one trader said. - With I-Net Bridge


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