Effects Of The September 11 Attack Essay

, Research Paper

THE ECONOMIC IMPACT OF THE ATTACK ON THE WORLD TRADE CENTER AND THE PENTAGON

The effects of the attacks on the World Trade Center and Pentagon are rippling throughout the world, by sector, by region, and by market. Bond markets, inside and outside the U.S., already jittery from a deceleration in worldwide economic activity, are struggling to find direction in the aftermath of the attack. There now seems little doubt that the U.S. and global economies will slip into recession. The aerospace, insurance and banking industries, directly connected with the attack, will suffer the most.

The airline sector had already been suffering a slowdown as a result of lower economic growth and cutbacks in business travel. Then, at the moment the first plane hit the first tower, the U.S. airline industry was dealt an even more severe blow. In the ten days that followed, nine U.S. airlines were downgraded or had their ratings put on credit watch with negative implications. Airports and aerospace also felt the credit impact. In New York, the Port Authority of New York and New Jersey, housed in the World Trade Center, was placed on credit watch with negative implications, and, in the days that followed, every North American airport and airport-related special facility and 13 commercial aerospace companies–airplane manufacturers; engine producers; suppliers of aircraft systems, components, and materials; and vendors providing aviation support—were put on credit watch with negative implications. The effect of the attack on the World Trade Center, due to diminished air travel, goes further in affecting the hotel industry and tourism.

Now, as the death toll rises and as property damage is beginning to be assessed, it seems quite likely that this catastrophe will be insurers’ largest-ever insured loss. Insurance analysts have said that, once losses exceeded $15 billion, it would expect to see a significant impact on the balance sheets of individual insurers. So far, estimated net aggregate insured losses, from 55 leading insurers and reinsurers, are $19.2 billion. This figure is expected to continue rising. Rob Jones, a director in Standard & Poor’s Financial Services group in London, has said that losses would have to exceed $50 billion before the entire industry were

in trouble, and it is fast approaching that line. Even in Asia’s emerging economies, insurance companies are likely to feel the impact of the attack. Although Asian companies are more likely to be affected by exposure to investment volatility more than by exposure to claims, the ratings on subsidiaries of foreign insurers may be affected in the event that their parent companies incur major claims as a result of the attacks on U.S. targets.

Alan Greenspan, chairman of the U.S. central bank, expects some difficult times ahead for companies and workers but remains optimistic about the long-term strength of the U.S. economy. Testifying before the House of Representatives Banking Committee September 20, Greenspan said that the September 11 terrorist attacks on the World Trade Center and Pentagon caused considerable uncertainty that resulted in business cutting back or delaying spending plans. “Indeed, much economic activity ground to a halt last week,” he said. Banks and investment banks have mostly weathered the initial phase of the dislocations caused by the attacks on the World Trade Center. The payments system continued to work even in the immediate aftermath of the disaster, and financial markets are now all open for business once again. Financial analysts plan to focus on the medium to longer-term implications. For example, credit exposure to those industries that may have been most affected by the disaster will add to the already mounting credit problems that some banks may have. Investment banks could be especially vulnerable to the business interruption and potential impact of a further slowdown in already weak capital markets. Any aggressive share buybacks will further reduce the tolerance threshold for earnings pressures. Outside the U.S., the attacks are likely to add to the pressures of banks, as investment volatility becomes a threat to the already precarious financial positions of banks.

Though the economic effects of the attack on the World Trade Center and the Pentagon have raised various opinions from financial analysts, none of them has the capacity to fathom fully how the tragedy of September 11 will play out. But in the weeks ahead, as the shock wears off, they should be able to better gauge how the ongoing dynamics of these events are shaping the immediate economic outlook.