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Bracing The Challenges Of Global Financial Crisis

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The global financial market has remained turbulent over the past few weeks.

First of all, the US government decided to take over Freddie Mac and Fannie Mae; next, Lehman Brothers reporterd its biggest ever loss, sending global equity markets sharply lower while the greenback slipped against major currencies and the US sovereign bonds and markets remained bearish. Equity and bond markets throughout the world, including Bursa Malaysia, have retreated.

The US governing body and investment banks have been talking about ways to bail out Lehman Brothers but to no avail. Lehman was left with the only other option of seeking bankruptcy protection.

What kind of impact will the US financial crisis have on global economy and financial markets worldwide? What are its implications on the Malaysian economy? What can the governing bodies do to cope with the situation? There is a need for us to further explore and analyse the situation.

Due to the severity of the case, US secretary of the treasury Henry Paulson has proposed that investment banks in Wall Street come up with the money to absorb Lehman's "bad assets" so that its remaining "sound assets" could be disposed of. At the same time, Federal Reserve chairman Ben Bernanke called up governors of major central banks to brief them of the situation in a bid to dissolve the current crisis. Paulson's solution has not been responded positively mainly because the amount of money involved is too high.

Paulson's proposal requires investment banks to come up with a total sum of US$30bn, and form the so-called "bad debt banks" to acquire Lehman's problematic housing mortgage assets. In other words, each of the investment banks must fork out about US$3bn to rid Lehman of its "bad assets."

Wall Street banks have their own share of problems at this moment, it is therefore within our expectations that they won't take out the money to buy Lehman's bad assets. Since Paulson has made it clear that no government money will be mobilised to bail out Lehman, investment banks are expected to swallow up Lehman's bad debts. Failure to sell the assets means applying for bankruptcy protection is Lehman's only other option available.

Barclays and Bank of America were the earliest to withdraw from the acquition talks. They were soon followed by other banks.

In fact, Wall Street had already prepared itself for vertical plunge of the futures markets on Monday if Lehman was declared bankrupt. As the Korean, Japanese, Hong Kong and Chinese markets were closed on Monday for mid-autumn festival, local shares were traded lower and will continue to do so over the next few sessions. The focus now is on the perfomances of US markets as well as the movements of foreign investors. With Wall Street anticipated to remain volatile, the local benchmark index is poised to be fluctuating over the next few days. Short-term investors must stay highly alert.

Former fed chairman Alan Greenspan labelled the current crisis in Wall Street as "unprecedented." He predicted more large financial institutions to wind up soon.

The influences on Malaysia could be explored from the following perspectives: Firstly, to stimulate the equity market, priority must be given to capital and market confidence, by encouraging investors to enter the market. If the direction is right, investor confidence should be restored soon. Although the government has proposed a series of stimulus packages in the past, it is impractical to expect the market to turn around within a short period of time. Other solutions to stimulate consumerism must also be implemented to expand domestic demands.

Secondly, with internationl raw material prices going higher, import costs have been pushed up, hence the inflationary pressure.

Thirdly, where the financial market is concerned, due to deteriorating international account balance and escalating inflation, the ringgit exchange rates and money supply will be affected, forcing the interest rates to go higher, which will negatively impact the country's economic growth.

In view of the volatility in the financial markets, it is imperative for Bank Negara to map out workable solutions to tackle the situation. First of all, the central bank should strive to maintain the stability of ringgit exchange rates and abandon the practice of allowing the local unit to depreciate in a bid to stimulate the economy, for this will only strain the account balance further.

Bank Negara must also stimulate consumerism, and make the public willing to take out the money to spend. However, this involves the public's confidence towards the future. (Translated by DOMINIC LOH/Sin Chew Daily)

MySinchew 2008.09.16

 

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