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Thu 16 Oct 2008 04:00 AM

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Read the ticker and don’t panic

Despite assurances, cash is king now and people around the world are stuffing it under the mattress like worried old farmers.

The huge electronic screen outside Dubai International Financial Centre displays moving tickers of listed securities that provide a welcome distraction to pedestrians and taxi drivers stuck in traffic.

This week it doubled up as a public announcement service, assuring investors that local banking deposits would be protected.

It is a message that many governments and financial regulators have been trying to convey worldwide this past month. But it seems the markets and the wider public have not been listening.

Cash is king now and people around the world are stuffing it under the mattress like old farmers.

Cash is king now and people around the world are stuffing it under the mattress like worried old farmers.

The herd mentality of investors is perhaps becoming a bigger problem for the global economy than trying to account for the underlying assets of questionable value that triggered what has become the worst financial crisis since the Great Depression.

The herd mentality has always moved markets but those that have refused to move with the herd have often profited most. Warren Buffett and George Soros are living examples.

Yet for most of us, the urge to preserve and protect our cash outweighs the desire to speculate. Central banks worldwide have been forced to guarantee deposits for this reason and prevent diminishing confidence in the banking system becoming a self-fulfilling prophecy by draining the liquidity that is its very lifeblood.

Earlier this week, the EU took the unprecedented decision to guarantee new bank debt and keep distressed lenders solvent. The speed of the decision took many by surprise.

Gulf economies need a similarly swift and common voice if they are to prevent the herd mentality infecting local markets unnecessarily.

It was a point well made by the Federation of GCC Chambers of Commerce earlier this week, which highlighted the failure of the GCC to come up with a coordinated response to the crisis.

Neither does this inaction bode well for the likelihood of GCC member states achieving monetary union by 2010.

Merrill Lynch this week underlined the relative strength of Gulf companies and their ability to meet borrowing commitments because most of the region's debt is owned by state-controlled entities - some 92 percent of the total to be repaid this year.

The underlying fundamentals of regional economies remain strong. Merrill may have cut its growth forecast for the region next year from 6.2 percent to 4.5 percent - but that is still growth that most other countries outside of the Gulf would be more than happy to take.

Putting the oil price and constricted credit markets to one side, there may be enough committed investment in regional real estate and infrastructure projects to both cushion and delay the impact of further external credit shocks.

But that should not deter regional governments from acting in a coordinated way to mitigate the potential for the global crisis further spooking local markets and harming sentiment.

Sean Cronin is the editor-in-chief of Arabian Business English.

Paul 11 years ago

The problem with the various governments underwriting bank deposits and bailing out banks with stock purchases and cash injections is that it sees a wholesale transfer of liabilities from private banks to national governments. So the debt has moved from consumers/homebuyers, to banks and lenders and now to states themselves. It has not cured the problem, merely spread it to even more critical places. The governments do not have enough money to guarantee all the banks as they have promised. The next stage of the credit crisis is forewarned by what happened to iceland. In the same way Northern Rock was a sign of things to come, so is Iceland. How are governments funding their interventions? By raising money from bonds, the main purchasers of which are... the banks. So the banks are lending money to the government to bail themselves out. It is just trying to prop up the pyramid scheme by the same measures that got us here. Too much borrowed money and convoluted smoke-and-mirrors financial products. The solution to too much borrowing is to cut back spending, raise taxes, pay down the debt and accept that a recession is inevitable. The national governments still think they can avoid a hangover for the raging party of the last 5 years. They cannot. The next stages of the credit crisis will be the breakdown of the finances of governments across the world where debt has accumulated. The only solution by those who control their own currencies will be massive printing of currency - devaluation like nothing we have seen before. Only gold and some commodoties will retain any value.